Thursday, November 15, 2012

Cycle Analysis and The Stock Market

When we talk about cycle analysis we will definitely think of WD Gann, the legendary stock and commodity trader who had made tons of money from the financial markets. It was estimated that in his lifetime he made $50 million from stocks and commodities. Imagine how much is $50 million 80 years ago translated to today's money. What was his secret?

He had the ability to forecast the market by studying the historical prices. He said, "Everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock market." (more quotes from him)

In 1928 the year before the crash he successfully predicted the crash in 1929 and said that it would take years for the stock market to recover. You may read his detail prediction  here.

Today I want to talk about one of his famous theory on the cycle analysis, its known as the Decennial Cycle or the 10 year cycle. According to Gann, he compiled the past 100 years of price data and put them on a chart. He plotted the y-axis as the price while the x-axis as the year ending with 1,2,3,4,5,6,7,8,9,0. The actual chart was very blur as it was a very old chart, so I try my best to illustrate on the chart below:

From the above chart, we can see that the year that ends with 1,2,3 such as 1981, 1982, 1983, 1991, 1992, 1993 and 2001, 2002, 2003 have a similar price pattern, they start from low price levels. Year that ends with 7 or 8 usually experience crashes.

Below is an extract from Gann's teaching:

Each decade or 10-year cycle, which is 1/10th of 100 years, marks an important campaign. The digits from 1-9 are important. All you have learn is to count the digit on your fingers in order to ascertain what kind of a year the market is in.

No.1 in a new decade is a year in which a bear market ends and a bull market begins. Look up 1901, 1911, 1921, 1931...

No.2 or the second year is a year of a mirror bull market, or a year in which a rally in a bear market will start at some time. See 1902, 1912, 1922...

No.3 starts a bear year, but the rally from the second year may run to March or April before culmination, or a decline from the second year may run down and make bottom in February or March, like 1903, 1913, 1923...

No.4 or the fourth year, is a bear year, but ends the bear cycle and lays the foundation for a bull market. Compare 1904, 1914, 1924...

No. 5 or the fifth year is the year of Ascension, and a very strong year for a bull market. It can be a new bull market or a big correction in an existing uptrend. See 1905, 1915, 1925...

No. 6 or the sixth year is a bull year, in which a bull campaign which started in the 4th year ends in the fall of the year and a fast decline starts. See 1896, 1906, 1916, 1926...

No.7 or the seventh year is a bear number, and the seventh year is a bear year because 84 months or 84 degree is 7/8 of 90. See 1897, 1907, 1917, 1927...

No.8 or the eighth year is a bull year. Prices start advancing in the seventh year and reach the 90th month in the eight year. This is very strong and a big advance usually takes place. Review 1898, 1908, 1918, 1928...

No.9 the highest digit and the ninth year, is the strongest of all for bull markets. Final bull campaigns culminate in this year after after extreme advances and prices start to decline. Bear markets usually starts in September or November at the end of the ninth year and a sharp decline takes place. See 1899, 1909, 1919, 1929...

No.10 the tenth year, is a bear year. A rally often runs until March and April; then a severe decline runs to November and December, when a new cycle begins and another rally starts. See 1910, 1920, 1930...

This is just one of the cycle theories, there are also the Presidential cycle (4 year cycle), secular bull and secular bear, yearly cycle, monthly cycle and many more. From the study of past cycles, we see a very clear picture that history seems to repeat itself and by learning more technical analysis theories we can make better investment decision to help ourselves to grow our wealth.

Finally, I'm going to end this article with a statistical table to show how accurate is this theory:



Happy investing,
Pauline Yong


No comments:

Post a Comment