This longtime S&C contributor explains the basis of the
existence of cycles in market data.
The markets are not always efficient;
this is why trading decisions
based on technical analysis
work. Chart patterns that are discernible,
technical events such as
double bottomsİ and Elliott
wavesİ, allow technically based
traders to make intelligent deci-sions.
Another key discernible
event that technical traders may
make use of comes in the form of cycles. As a rule, it is not
a task of much difficulty to identify cycles; a simple ap-proach,
such as measuring the distance between successive
lows, can be used to measure them, or a more sophisticated
approach using computer algorithms such as maximum entropy
spectral analysis (MESA) can be used.
However, the observation that cycles exist is not to imply
that they exist at all times. Markets can be caught off-guard
by events that can and have on occasion dominated and
obscured present cycles. Research indicates that cycles use-ful
for trading are present only about 15% to 30% of the time,
corresponding with technician J.M. Hursts comment that
23% of all price motion is oscillatory in nature and semi-predictable.
The situation is comparable and indeed parallel
to the problem that the trend-follower faces when he or she
finds that the markets trend only a small percentage of the time.