Many market analysts believe that time cycles play an important role in market movement. Because these time cycles are repetitive and can be measured, it is possible to determine the approximate times when market tops or bottoms will occur. Many different time cycles exist simultaneously, from a short term 5 day cycle to Kondratieff's long 54 year cycle. We'll delve more into this fasci­nating branch of technical analysis in Chapter 14.
The subject of cycles is introduced here only to make the point that there seems to be a relationship between the underly­ing cycles that affect a certain market and the correct moving averages to use. In other words, the moving averages can be adjusted to fit the dominant cycles in each market.
There appears to be a definite relationship between mov­ing averages and cycles. For example, the monthly cycle is one of the best known cycles operating throughout the commodity mar­kets. A month has 20-21 trading days. Cycles tend to be related to their next longer and shorter cycles harmonically, or by a factor of two. That means that the next longer cycle is double the length of a cycle and the next shorter cycle is half its length.
The monthly cycle, therefore, may explain the popularity of the 5, 10, 20, and 40 day moving averages. The 20 day cycle measures the monthly cycle. The 40 day average is double the 20 day. The 10 day average is half of 20 and the 5 day average is half again of 10.
Many of the more commonly used moving averages (including the 4, 9, and 18 day averages, which are derivatives of 5, 10, and 20) can be explained by cyclic influences and the har­monic relationships of neighboring cycles. Incidentally, the 4 week cycle may also help explain the success of the 4 week rule, covered later in the chapter, and its shorter counterpart—the 2 week rule.