Below is a 2-hour chart of SPY, the S&P 500 SPDR. I am experimenting with this new chart style to add some color to my site. There is just too much gray. I used the 2-hour chart because it shows more details. Below the chart you can see the Detrended Price Oscillator (DPO). DPO is not designed to give momentum signals but rather to estimate cycle length. I am using DPO to "predict" the next bottom. Keep in mind that this is only an estimate.
The market moves in cycles in any timeframe. Cycle analysis can be helpful when trying to time the market especially for those who trade options. What we are trying to do is “predict” future market tops and bottoms based on past cycles. The chart below shows short term cycles for DIA. These cycles can be helpful to determine the next possible market low for DIA. This could possibly happen in early November. Right now it looks like the distribution phase has started which could last for a couple of weeks. The cycle length is roughly 46 days, you can see this number on the bottom of the chart above June 24 next to the cycle line.
The yield curve plots the interest rates of bonds with different maturity dates at a specific time. Usually the yield curve compares the three-month, two-year, five-year, seven-year, 10-year, 20-year and 30-year Treasury debt. Studying the yield curve helps us to better understand the economic cycle and predict changes in the economic growth. At different stages of the economic cycle the yield curve also changes shape. There are three main types of yield curves, normal, flat and inverted. The yield curve is normal when the interest rate of bonds with shorter maturity date is less then with longer maturity dates. Normal yield curve is associated with strong and healthy economy. After an extended period of time the spread between interest rates of bonds with shorter term maturity date and longer term maturity date decreases. At some point the yield curve flattens out and even gets inverted where the interest rate of bonds with longer maturity date is less than for bonds with shorter maturity date. This scenario happens months or years before the economic cycle reaches a peak and turns into recession. The chart below shows the yield curve at different times (see red vertical lines on the chart below). On this chart you can see how the yield curve changed shape. Currently the yield curve is normal which is very healthy for the stock market. It is not as steep as it was in 2009 (see the chart below).
As cycles are part of nature they are also part of financial markets. As prices change highs and lows repeat itself on a regular basis. Price and time cycles can help us to anticipate turning points. Normally lows are used to define cycle length and then project future cycle lows. The lenght of cycles can change over time. Cycle analysis works best if combined with other apects of technical analysis. One of the cycle characteristics is translation. Translation describes where is the peak during a cycle. Most of the time peaks occur before or after the midpoint of the cycle. Right translation occurs when the peak is after the midpoint of the cycle. Usually in a storing bull market cycles have right translation. Left translation occurs during bear markets when the cycle peaks earlier during the cycle. At market tops and bottoms peaks are closer to the midpoint. The chart below shows a possible outcome of the current market using cycle analysisfor SPY.
As you can see so far the cycles of SPY have right translation wich is bullish.