The Myth Behind Cycles
Tim Wood Of
Cycles News & Views
by Jayanthi Gopalakrishnan
Tim W. Wood is editor and publisher of Cycles News & Views, which provides technically based research and analysis on the stock market, gold, bonds, the dollar, and more. This research is primarily based around two proven disciplines. One, classic Dow theory, was a method of market analysis developed by Charles H. Dow more than 100 years ago, and Wood's application of Dow theory is based on the original writings of Charles Dow and his predecessors. The other discipline he uses is a quantitative approach based on cyclical analysis. These methods were used for more than a year and a half in advance to forecast the decline into the 2002 stock market low. Other calls include the 2001 top in the dollar and the 2001 bottom in commodity prices and gold.STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Tim Wood via telephone on March 8, 2005.
A number of things make me think gold has topped. The four-year cycle is still up in the stock market, but I think that's due to top.
Tell us how you got started in technical analysis.
I originally started studying cycles through the works of Walter Bressert, about 15 years ago. Everything I really know about cycles came from Walter. He was a wonderful cycles pioneer. That was the only cycles course I ever took. Why would you need more?
Have you only worked on cycles, or did you start out with technical analysis?
I started out with technical analysis, and then I looked at Elliott waves and other things. What struck me about cycles is that they are a way to quantify a move. Basically, you're profiling. You can develop expectations of trend, and you can also find there are trends within trends by looking at the different cycles. There are cycles you look at on a monthly chart, versus cycles you look at on a weekly chart, versus cycles you look at on a daily chart. It's a way to quantify at multiple levels.
Can you give some basics of cycles and how you identify lows and tops? How can you identify the start of a cycle?
There's an annual cycle in the stock market that averages about 12 months. People call the next smallest cycle a "20-week cycle," but it actually averages about 22 weeks. Then there's a trading cycle that averages about 40 days, roughly. So essentially, you're working from all the ends to the middle.
For instance, if you know the annual cycle is about to bottom -- because you know it averages 12 months, and you are in the 12th month -- you know you're within the timing window because you know that 70-80% of the cycles fall within this time frame. Not only that, you know you're also in the window for your smaller 20-week cycle. Then you look at the timing for the trading cycle, which is the 40-day cycle, and you know you're in the window for that. There's a high probability of all the three different levels of cycles timing in together.
When that happens, you use oscillators to help identify the cycle tops or bottoms, in conjunction with those timing bands. Ultimately, you want to catch the swing lows at different degrees. You want to see a swing on the daily charts, one on the weekly, and one on the monthly. It's a progression of different verification levels.
So they have to all confirm at the same time.
That's right. When you go into the timing band for the larger cycle, that should also be the timing band for the medium and smaller cycles. But then you work backward, going from the shorter to the longer cycle. You might see that your short-term indicators were oversold and they turned up, and that you have a swing low. The next level of verification will be with the weekly. So if again you see that the indicators for the 20-week cycle have turned up, that would serve to confirm a swing low. Then, ultimately, the last level of confirmation would be a turn in the monthly indicator, which would confirm a monthly swing low.
...Continued in the May issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the May 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
Return to May 2005 Contents