Cycles

The root of the problem of time cycle is, that there always seems to be a current, or dominant cycle, that we can see on our chart right now. The rub is, another cycle is always about to become dominant, overpowering the one we have just located and invested in.
Larry R. Williams (2003): Long-Term Secrets to Short-Term Trading, p. 23

There are those who no matter what you show them or what you say, they will never believe in cycles. For those of us who do, we need that disbelief to trade against.

Martin Armstrong



Cycles may be defined as any phenomena repeating after fairly regular time intervals. 

HERE & HERE
Generally cycles are found in anything to which numerical measurements may be assigned at intervals in time. Edward Dewey of the Foundation for the Study of Cycles said that every field studied had been found to have cycles.

The cause of cycles is generally that some restorative force exists whenever any system is displaced from its equilibrium. This applies equally to the motion of a pendulum, the orbiting of planets and the state of the economy, because it doesn't matter whether the system and the restoring force is physical or not.

It may be confidently said that although cycles are found in everything, they are never perfectly regular, but the period of the cycles also varies in cycles. In the case of the planets, they have eliptical orbits causing small variations in motion, but the disturbance of other bodies also causes other variations over varied time scales.

Because everything in the universe affects everything else, all vibrations, oscillations and disturbances reverberate about forever, continuously interacting. The wave nature of the universe is attested to by all modern scientific theories and the study of cycles is a wonderful way to study how influences move from one place to another, one time to another and one field of study to another. This can be done because cycles have many specific periods present that can be recognized, like fingerprints, when they appear somewhere else (
Credits: www.cyclesresearchinstitute.org).

Do cycles work in finance? I always feel uncomfortable answering this question, as it depends on what we are looking for ... we deal with the fast evolution of open systems. The stock market now and the stock market in early 1990s are totally different entities - electronic trading systems have changed the look of this land a lot. The stock market in early 70s and in 90s are different entities as well - the money of big financial institutions have changed the landscape of the stock market land significantly. And the stock market in the beginning of 20th century compared to the stock market in 70s is also a different entity - economical forces have been changed a lot within this period ...
Another peculiarity of financial cycles (and any phenomena where the humankind plays the main role) is that they work inside an OPEN system. What forces move or affect the stock market? It seems to me - everything: FED news, economical/corporate reports, the weather, political perturbations and many other factors plus something that we do not know yet. This is what we call fundamental factors. If in geology we can specify the most influential factors and create models based on these factors, in regards to the stock market we cannot do that as there are too many factors. As a result, a geologist can be a very specialized professional using a very specific set of factors, while a financial analyst cannot do so. A financial analyst has to keep an open mind taking into consideration too many factors.
Add to that the fact that the influence of fundamental factors on the stock market is indirect. There is an agent between the two, and it is the humankind. FED news does not affect the stock market directly, it is a reaction of traders/investors on these news that affects the stock market. Therefore, creating forecast models (for example, a Neural Network model) that take into account fundamental factors (FED actions, oils price, etc.) and cook from these factors a probable price movement, we forgot about about humankind who estimates all these fundamental factors.
Sergey Tarassov (2011)
The 9-Month Cycle

The  most important cycle in my work is the 9-Month Cycle. The 9-Month Cycle goes by other names - the 40-Week Cycle, the 39-Week Cycle, and the 8.6-Month Cycle, to name the ones I can think of at the moment. A lot of people follow it, and it is, I have come to believe, the most important cycle for use in intermediate-term market forecasting, because it helps us plan for and quickly identify the most important declines and rallies that we will encounter within the course of a year. Even if you are a short-term trader, it is essential that you be aware of the progress of the 9-Month Cycle so that you will be in tune with next higher trend.

The illustration above shows the basic structure of the 9-Month Cycle. As you can see, it consists of two 20-Week Cycles, labeled as "Phase 1" and 'Phase 2". Likewise, the 20-Week Cycle consists of a Phase 1 and 2 10-Week Cycle.

Credit: www.sentienttrader.com
The most powerful rally during the 9-Month Cycle will normally occur during the first three months of the cycle as all three nesting cycles are combined in a united upward move. Conversely, the period when the market is most vulnerable to a significant decline is during the last three months of the cycle when all three cycles are moving downward together into their final troughs.

In a bull market the 9-Month Cycle crest  normally occurs in the sixth to eight month in the cycle (right translation), and in a bear market the crest should be expected in the second or third month of the cycle (left translation).

In addition to the cresting of the 9-Month Cycle, the next most significant event is the cresting and completion of the Phase 1 20-Week Cycle. This can materialize as a minor price correction or consolidation in a bull market, but in a bear market it will likely coincide with the cresting of the 9-Month Cycle.

Knowing this basic 9-Month Cycle structure, we can consider that we are at the least risk establishing new long positions during the first three months of the cycle, and the greatest risk of decline comes in the last three months of the cycle. The three months in the middle is a time when caution should be exercised - it can present risk as the Phase 1 20-Week Cycle rolls over into a trough, and it also can present new opportunity as the Phase 2 20-Week Cycle begins to move up (Credits: www.decisionpoint.com).