Applied Cycle Analysis

The objective of the MarketScalpel cycle analysis is to allow traders to dynamically tailor their holding periods to capture maximum performance.

We use cycle analysis on a standalone basis and as an aid to interpreting the Volume Confirmation signals.  Please see a basic introduction to the principals of cycle analysis and terminology.

Our web-based research platform uses a spectral analysis algorithm with a fractal filter to identify frequency response and, by extension, the presence of cyclicality. This is derived from a mathematical analysis technique originally developed for digital signal processing to filter noisy frequency data. In the Traders' Edition Newsletter, the interplay of individual cycles is additionally analyzed manually for a selected set of sectors.

The analysis seeks to identify cycles (and associated frequencies) that provide the greatest amount of regular, periodic price movement at the sector level. Our spectral analysis algorithm has the advantage of working well with small data samples making it highly responsive to changes in the dominant cyclicality.

Interpreting Cycle Charts

The MarketScalpel sector charts provide two dominant cycle estimates; a long cycle and a short cycle.

These are graphically represented in the default sector chart by oscillators with the long cycle colored green and the shorter cycle in orange.

Additional text-based information necessary for evaluation is presented in the legend to the right of the chart, as well in the Cycles Sector Overview table (see Market Navigator).

The key evaluation factors are:

Cycle Length:

  The length is the number of trading days of a full cycle (e.g. measured from a bottom to the next bottom on the oscillator). The longer the cycle, the easier it tends to be to trade

Cycle Fit:

  Our spectral analysis algorithm will always seek to fit the best cycle estimate given the parameters supplied but the cycle fit score provides a ranking of the fit after it has been estimated.

A score of greater than 75% is generally a very good fit. A score of less than 50% is generally a poor fit

Days To/From Top/Bottom:

  An estimate of the number of trading days from the current position to the next projected cycle high and low respectively.

Even when the fit is good, these are estimates and should typically be used in conjunction with other indicators such as our Volume Confirmation signals.

Particularly the “Days To Top” should be treated with some caution, as cycles can often have left or right translation meaning that the top occurs late (or early) even though the cycle is well-defined in terms of the bottom-to-bottom symmetry, which tends to be the more stable measure of cyclicality..