by John F. Ehlers
If you've always suspected that contracts have definite personalities, you would have your suspicions
confirmed this way. Here's an overview of various cycles that appeared in some futures markets during
1991, the way only John Ehlers could explain it.
In years past I have reported on the cyclic character of various commodity contracts, concluding that
tradeable cycles were present from 15% to 30% of the time and that some contracts tend to have definite
cyclic personalities.These conclusions were reached by making spectral estimates on a daily basis and
then gathering and displaying the results in a histogram over the full year. The histogram allowed
observation of how many times a 12-day cycle occurred, for example. This approach still makes the
spectral estimate on a daily basis, but the display has been changed to view the continuity of the cycle
content. This display shows the tradeable cycles, multiple simultaneous cycles and even failure of cyclic
activity. The display allows you to pick entry points even when the market is in the trend ode by knowing
the position of the superimposed cyclic extremes.
BUT FIRST, A LITTLE THEORY
Imagine a white light shining at a prism. The prism separates the white light, allowing the component
colors or wavelengths to be seen. Sir Isaac Newton invented the word "spectrum" to describe the
separation into components. Any band of wavelengths can have a spectrum, even the cycle lengths that appear in the market. The spectral estimates in Figures 1 through 12 were made using the MESA
algorithm. MESA computations are the functional equivalent of applying the price data to a bank of filters,
which spans cycle periods from eight to 50 days, with each filter in the bank only allowing its tuned cycle
length to pass. The amplitudes of the filter outputs are sensed, and these amplitudes are compared to form
the spectrum display. Figure 1 shows a theoretical 20-day sinewave cycle. The spectrum window in the
upper-left-hand corner of the bar chart shows that the 20-day cycle is the only cycle present.