Before we dive into Time-Cycles, let’s looks at cycles in general.
A cycle is an event which repeats itself on a regular basis. Cycles exist all around us, and we interact with them each day. Think of the 28-day life cycle of a fly, the four seasons of the year, and solar activity. Even music has cycles to it.
Examining cycles in the market can help us time where the market may be going in the future based on past performance. To analyse the passage of time, Fourier analysis is used.
Jean-Baptiste Fourier was a French mathematician and physicist. His Fourier transform breaks down time into a set of frequencies. That sounds complicated, but you can think of it in terms of music. A musical chord is nothing more than the volume and frequencies of its notes. So, time is just like a set of musical notes.
By using time-cycles, we can anticipate the turn (when the change could occur) in the market. To determine this turn, a composite time cycle forecast is created. This composite is composed of multiple time cycles that have been found to be the most predictive in the recent past.
In time-cycle analysis, we are less focused on the exact price the amplitude may predict. Instead, our focus is knowing that a top or a bottom may be coming. In other words, we care most about the direction the cycle is pointing.
Cycles, of course, can change. They are not set in stone. Think back to our season example. Historically, Florida has pretty mild winters when compared to other states like Illinois or Michigan or New York. Still, from time to time, the Sunshine State will get snow. Snow Birds who expect a mild winter cycle get treated to something out of the norm.
So, time-cycle analysis should be used along with other technical analysis to anticipate moves in the markets. These cycles can sometimes miss, disappear, or hit the nail on the head when it comes to predicting turns in the market.