The most intriguing book I've ever read on the subject of cycles was written by Edward R. Dewey, one of the pioneers of cyclic analysis, with Og Mandino entitled Cycles: The Mysterious Forces That Trigger Events. Thousands of seemingly unrelated cycles were isolated spanning hundreds and, in some cases, thousands of years. Everything from the 9.6 year cycle in Atlantic salmon abun­dance to the 22.20 year cycle in international battles from 1415 to 1930 was tracked. An average cycle of sunspot activity since 1527 was found to be 11.11 years. Several economic cycles, including the 18.33 year cycle in real estate activity and a 9.2 year stock market cycle, were presented.
Two startling conclusions are discussed by Dewey. First, that many of the cycles of seemingly unrelated phenomena clus­tered around similar periods. On p. 188 of his book, Dewey listed 37 different examples of the 9.6 year cycle, including caterpillar abundance in New Jersey, coyote abundance in Canada, wheat acreage in the U.S., and cotton prices in the U.S. Why should such unrelated activities show the same cycles?
The second discovery was that these similar cycles acted in synchrony, that is, they turned at the same time. Figure 14.3 shows 12 different examples of the 18.2 year cycle including mar­riages, immigration, and stock prices in the U.S. Dewey's startling conclusion was that something "out there" in the universe must be causing these cycles; that there seemed to be a sort of pulse to the universe that accounted for the pervasive presence of these cycles throughout so many areas of human existence.
In 1941, Dewey organized the Foundation for the Study of Cycles (900 W. Valley Rd., Suite 502, Wayne, PA 19087). It is the oldest organization engaged in cycles research and the recognized leader in the field. The Foundation publishes Cycles magazine, which presents research in many different areas including eco­nomics and business. It also publishes a monthly report, Cycle Projections, which applies cyclical analysis to stocks, commodities, real estate and the economy.
Basic Cyclic Concepts
In 1970, J.M. Hurst authored The Profit Magic of Stock Transaction Timing. Although it deals mainly with stock market cycles, this book represents one of the best explanations of cycle theory avail­able in print, and is highly recommended reading. The following diagrams are derived from Hurst's original work.First, let's see what a cycle looks like and discuss its threemain characteristics. Figure 14.4 shows two repetitions of a pricecycle. The cycle bottoms are called troughs and the tops referred toas crests. Notice that the two waves shown here are measured fromtrough to trough. Cyclic analysts prefer to measure cycle lengths fromlow to low. Measurements can be taken between crests, but they arenot considered to be as stable or reliable as those taken between thetroughs. Therefore, common practice is to measure the beginningand end of a cyclic wave at a low point, as shown in this example.The three qualities of a cycle are amplitude, period, and phase.Amplitude measures the height of the wave as shown in Figure14.5, and is expressed in dollars, cents, or points. The period of awave, as shown in Figure 14.6, is the time between troughs. In thisexample, the period is 20 days. The phase is a measure of the timelocation of a wave trough. In Figure 14.7, the phase differencebetween two waves is shown. Because there are several cycles occurring at the same time, phasing allows the cyclic analyst to study the relationships between the different cycle lengths. Phasing is also used to identify the date of the last cycle low. If, for example, a 20 day cycle bottomed 10 days earlier, the date of the next cycle low can be determined. Once the amplitude, period, and phase of a cycle are known, the cycle can theoretically be extrapo­lated into the future. Assuming the cycle remains fairly constant, it can then be used to estimate future peaks and troughs. That is the basis of the cyclic approach in its simplest form.
Cyclic Principles
Let's take a look now at some of the principles that underlie the cyclic philosophy. The four most important ones are the Principles of Summation, Harmonicity, Synchronicity, and Proportionality.
The Principle of Summation holds that all price movement is the simple addition of all active cycles. Figure 14.8 demonstrates how the price pattern on the top is formed by simply adding together the two different cycles at the bottom of the chart. Notice, in particular, the appearance of the double top in compos­ite wave C. Cycle theory holds that all price patterns are formed by the interaction of two or more different cycles. We'll come back to this point again. The Principle of Summation gives us an impor­tant insight into the rationale of cyclic forecasting. Let's assume that all price action is just the sum of different cycle lengths. Assume further that each of those individual cycles could be iso­lated and measured. Assume also that each of those cycles will con­tinue to fluctuate into the future. Then by simply continuing each cycle into the future and summing them back together again, the future price trend should be the result. Or, so the theory goes.The Principle of Harmonicity simply means that neighbor­ing waves are usually related by a small, whole number. That number is usually two. For example, if a 20 day cycle exists, the next shorter cycle will usually be half its length, or 10 days. The next longer cycle would then be 40 days. If you'll remember back to the discussion on the 4 week rule (Chapter 9), the principle of harmonics was invoked to explain the validity of using a shorter 2 week rule and a longer 8 weeks.The Principle of Synchronicity refers to the strong tenden­cy for waves of differing lengths to bottom at about the same time. Figure 14.9 is meant to show both harmonicity and syn­chronicity. Wave B at the bottom of the chart is half the length of wave A. Wave A includes two repetitions of the smaller wave B, showing harmonicity between the two waves. Notice also that when wave A bottoms, wave B tends to do the same, demonstrat­ing synchronicity between the two. Synchronicity also means that similar cycle lengths of different markets will tend to turn together.
The Principle of Proportionality describes the relationship between cycle period and amplitude. Cycles with longer periods (lengths) should have proportionally wider amplitudes. The amplitude, or height, of a 40 day cycle, for example, should be about double that of a 20 day cycle.
The Principles of Variation and Nominality
There are two other cyclic principles that describe cycle behavior in a more general sense—The Principles of Variation and Nominality.
The Principle of Variation, as the name implies, is a recog­nition of the fact that all of the other cyclic principles already mentioned—summation, harmonicity, synchronicity, and propor­tionality—are just strong tendencies and not hard and fast rules. Some "variation" can and usually does occur in the real world.
The Principle of Nominality is based on the premise that, despite the differences that exist in the various markets and allow­ing for some variation in the implementing of cyclic principles, there seems to be a nominal set of harmonically related cycles that affect all markets. And that nominal model of cycle lengths can be used as a starting point in the analysis of any market. Figure 14.10 shows a simplified version of that nominal model. The model begins with an 18 year cycle and proceeds to each successively lower cycle half its length. The only exception is the relationship between 54 and 18 months which is a third instead of a half.
When we discuss the various cycle lengths in the individ­ual markets, we'll see that this nominal model does account for most cyclic activity. For now, look at the "Days" column. Notice 40, 20, 10, and 5 days. You'll recognize immediately that these numbers account for most of the popular moving average lengths. Even the well known 4, 9, and 18 day moving average technique is a variation of the 5, 10, and 20 day numbers. Many oscillators use 5, 10, and 20 days. Weekly rule breakouts use the same num­bers translated into 2, 4, and 8 weeks.