A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis

CHAPTER 20

Cycle Analysis

LEARNING OBJECTIVES

After studying this chapter, the practitioner and student should be able to:

• Understand how to identify important price cycles in the market and use them to forecast potential reversal and continuations in the market
• Describe the various cyclic principles and how they affect market action
• Calculate the correct lookback periods for centered moving averages, window oscillators, and overlay indicators
• Understand how chart patterns are formed from cyclic and trend components

Cycle analysis is an important part of technical analysis. In this chapter we shall cover the most important principles of cycle analysis, including the various approaches to identifying price cycles. We shall also learn how to effectively tune oscillators and overlay indicators to the most significant cycles within the period of observation.

20.1 ELEMENTS OF CYCLE ANALYSIS

Price Cycles

Price cycles are simply oscillations in price. They are characterized by price making peaks and troughs in a fairly regular and consistent manner. Many practitioners refer to price cycles as time cycles. This is erroneous. Time only moves forward, as required by the laws of thermodynamics. Time does not cycle or oscillate. As time progresses along its forward path, it is price that exhibits cycles. The highest part of a cycle is referred to as the peak, crest, or high, whereas the lowest part a cycle is referred to as the trough, bottom, or low. Refer to Figure 20.1

FIGURE 20.1 ...