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Cycle Convergence
The recent discussion concerning bond cycles prompted me to spend a
little time over this long holiday weekend writing on some of the work
that I have done in this regard. Perhaps others have taken a similar
bent and can show me ways of approaching the topic that I have not yet
recognized.
It seems that most cycle analysis begins with an attempt to force
particular cyclical periods into historical data in order to discover
a rhythm in which we can predict the future. I have taken a slightly
different tact. Rather than trying to isolate and identify particular
cycle lengths, I cast a wide net, looking at cyclical activity over
many different time periods in an attempt to identify convergence.
Once converging cyclical activity is identified, I can feel fairly
confident that a move opposite to the current trend is about to take
place. It is my belief that one of these periods is currently upon
us, and I will attempt to explain my analysis in what follows.
I have created what I call the Cycle Convergence indicator (subgraph2
in the us_mnth.gif file in the attached BondCy1.zip file) which
measures cyclical influences over 5 different time frames, each of
which is a multiple of the timeframe displayed in subgraph 1. The
theory behind this indicator borrows heavily from cycle concepts
espoused by Walter Bressert and uses some fairly standard
oscillators. By applying this indicator to several different time
frames, I can cast a very wide net, and get a feel for the number of
cycles that are coming together at any one point in time. It's a fast
way of identifying time periods that merit further scrutiny.
If we look at the us_mnth.gif, which is a monthly continuous contract
of T-Bonds, we notice that the indicator (subgraph 2) consists of 5
lines, each representing the oscillator value for a different time
frame. When these lines begin to converge at a high or low extreme, we
know that the cyclical influences from these five different time
frames are coming together and a move in the opposite direction is
highly likely.
The Cycle Top/Bottom Picker indicator (subgraph 3) measures two
different aspects of the lines displayed in the Cycle Convergence
indicator. 1) The red line measures the spread of the five different
periods. A low value on the red line indicates that the cyclical
components of all 5 different time periods are coming together and an
opposite reaction is likely. A buy/sell trigger occurs when the red
line first turns up from below 30. 2) the blue line measures the
average of all 5 lines and tells us how far to the extreme we are.
A study of this chart tells us that the cyclical components of this
time frame and its multiples (1 month, 2 months, 3 months, 4 months,
and 5 months) are in the process of working towards a top. The red
line in the Cycle Top/Bottom Picker indicator is below 30 and the blue
line is at a high extreme. An upturn in the red line would be a sell
signal for this time frame. A review of past history of this signal
shows us that it has been premature at times (especially at the
beginning of bull moves), so I would look for confirmation in shorter
time frames before taking action.
If we look at the weekly chart (us_wkly.gif), we see a very similar
picture. The lines in the Cycle Convergence indicator are working
towards a high extreme and the red line of the Cycle Top/Bottom Picker
is below 30. And lo & behold!, we have the exact same thing happening
on the daily chart (us_day.gif - I exceeded file size limitations in
this post. Us_day.gif, us_intra.gif and sp.gif are attached in a
subsequent Bond Cycles #2 post).
Well, I'm always one for reducing risk, and one way to do that is to
work in smaller time frames (us_intra.gif ). The Cycle Convergence
Indicator in the 48 minute chart (leftmost) is again working towards a
high extreme, but the red line in the Cycle Top/Bottom Picker is not
below 30 yet, so I'd expect to a have a little more time to go before
the peak is hit. The Cycle Top/Bottom Picker in the 24 minute chart
(middle) is below 30, so we're set up for a sell signal in this time
frame. The 12 minute chart (rightmost) has already given a sell signal
on Friday, but the other charts are telling me that we might have at
least one more run at Friday's high (and maybe even exceed it), so
I'll wait for at least one more pivot in this time frame before I go
short, and place my protective stop just above that pivot high.
An interesting side note to this analysis is that I'm getting almost
exact opposite readings in S&P futures (sp.gif), which one would
expect, given the high degree of inverse correlation exhibited between
these two markets recently.
Another note - although I normally leave astrological analysis to
those more qualified than I (which is just about everybody else), it
has been my observation that bonds often mark significant acceleration
or turning points on market days which fall on either side of the day
of the full moon (Sunday, 9/6).
A point of additional clarification before I wrap things up here - I
am NOT saying that my indicators are telling me that we are currently
working towards the top of all tops in bonds or the bottom of all
bottoms in the S&P. From what I've seen, they just don't exhibit that
kind of precision. What I AM saying is that my indicators are telling
me that cycles are currently converging to such an extent that we
could have some very heavy downward pressure on bonds, and very heavy
upward pressure on the S&P. Personally, I rely on other, more
mechanical, means of entry, exit, and protective stops in exploiting
such moves.
So that, in a nutshell, is the way in which I attempt to identify
cyclical activity. Anybody else out there working along similar
lines? I'm open to any and all feedback (as long as you don't
threaten to put me on the Disney list!).
Bob Hunt
Attachment Converted: "c:\eudora\attach\BondCy1.zip"
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