Using Short-Term Market Cycles to Your Advantage

Much has been written about long-term market cycles. They have become well known, and this year’s price action makes it look as if they have been anticipated and discounted by the market. For example, the market was not weak in September and October like it was supposed to be. Instead it has been going straight up since August. Likewise, this year the 4-Year Cycle and the Presidential Election Cycle have not been behaving the way they are supposed to.

There is a shorter-term market cycle which is quite persistent. For the sake of discussion, let’s call it the 4-Week Cycle. The market and most individual stocks tend to bounce along on their charts, making short-term lows that are about 20 to 25 trading days apart. The highs also tend to be about 20 to 25 days apart. Sometimes the cycle compresses to three weeks. It may stretch out to six or seven weeks. Sometimes it will exhibit remarkable regularity for a few months and then disappear altogether. But it always comes back. I think the 4-Week Cycle is just the effect of short-term traders constantly at work within longer-term trends – buying dips and selling rallies.

The 4-Week Cycle would be very easy to trade if it were regular and if the market did not trend! You could buy whenever the price was below the range of the preceding 10 days, then sell and go short when the price was above the range of the preceding 10 days, and cover your short and go long once again when the price fell below the range of the preceding 10 days. It wouldn’t take long to make a fortune, and I suppose that is why this cycle keeps disappearing after it has worked well for a few months.

The cycle is not regular enough to trade, but it can be useful to long-term investors for timing their purchases.

Whenever current price is below the 10-day range, the stock or index is oversold and at least a bounce is likely within the next few days. Everything else being equal, this is probably a good time to buy. Also, when the price is above the 10-day range, the stock or index is overbought on a short-term basis and this is probably a better time to sell than to buy. A decline or several days of sideways price action can be expected, so purchases should be deferred. I use closing prices to calculate the 10-day range.


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