Cycles and Momentum

The Prudent Trader is embarking on what will hopefully be a very successful and fun, over time, experiment. I’m sure each and everyone of you have heard the term cycles and know what they are. If you’ve been around the markets for any length of time you’ve also heard, and/or read about cycles inverting. That cycle point was supposed to be a top, but was a bottom instead.

I have a program that uses a loop function to automatically find one possible cycle period solution.  The product is derived from Channels and Cycles: A Tribute to J. M. Hurst by Brian J. Millard, the program uses centered moving averages to visualize the cyclic components and a ‘best fit‘ sine wave to extrapolate to the right-hand edge.

For example:

In addition if you’ve fooled with cycles in the past you know that a cycle may left or right translate. What that means is simply if the cycle projection is for a high/low next Friday, it might have already occurred or it might not occur for another two weeks, depending upon the cycles length of course. If we look at the cycle and a selected period before and after the projected date as a window of opportunity then we can employ certain momentum characteristics for entry and exit.

As you can see in the above example the low was a bit left translated meaning that the actual low for the move occurred prior to the cycle low projection. This has and will continue to prove quite a challenge for most cycle enthusiasts. Of course had we at the time employed a momentum buy signal lets say in May, prior to the projection, we might have been long, let’s say in late June, early July, depending on the means employed.

The chart now suggests we are in the window of opportunity for a short position, but there has not as yet been a momentum sell. There may not be in this example in the time allotted.

The idea we are testing an putting forth is simply this; suppose we split these cycles into Quartiles and allow a period of time around a projected peak/trough of one quartile of the cycle length. Therefore if a cycle is left/right translated we can hopefully capture a piece of the impending move by utilizing the projected cycle turn plus momentum. Therefore for one quartile prior to a low to one quartile subsequent to that low we’ll be placing a buy stop basis our momentum formula.  If the time frame expires so does the buy/sell stop.

As an aside and a personal interest are the leveraged ETFs. As I’ve stated many times my experience dealing with the public in the business says that despite the lip service they will not sell short. The leveraged ETFs open the short side of the market as a buying opportunity.  Secondly the two and three times leveraged provide an interesting speculation if handled correctly.

The screen for candidates is run on Friday’s and is included in our stock screens section (See navigation bar to the left).

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  1. Pingback: ETF Cycle Charts | Prudent Trader

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