Charles H. Dow described the movements in the stock market with the tidal and wave action of the ocean. He described the primary trend as being the long-term upward or downward movement and he likened this movement to that of the ocean tide. He described the intermediate term move as that of the waves and finally he described the short term and most often meaningless daily movement as that of ripples. Each of these movements occur simultaneously in the market and they can each be moving in various directions at any given time. The key is to know the direction of the longer term trend.
This analogy, used by Mr. Dow, can also be applied to the various cyclical movements of the market. For example, the long-term 9-year cycle in gold bottomed in April 2001. From this low the tide turned bullish and gold prices have advanced accordingly. The next cycle of smaller degree is the seasonal cycle. This cycle averages approximately 11 months in duration. The most recent seasonal cycle in gold bottomed on April 8, 2003 at 319.80. Once this cycle low was made, the seasonal cycle then turned up in alignment with the 9-year cycle and the stage was set for gold prices to advance. In my work, it is the seasonal cycle that can be used as a barometer in which we can monitor the health of a given tidal or bull market advance. I'll explain more on this below.
Nestled within the larger seasonal cycle is the intermediate term 18-week cycle. This cycle last bottomed on July 16, 2003 at 340.60. The rally that followed on July 23, 2003 carried gold above the previous short term trading cycle top which had occurred on July 1, 2003 at 353.80. It was the breakout above the July 1st top that confirmed the 18-week cycle low had occurred. At this point we had the 9-year, the seasonal and the 18-week cycles all moving up in tandem.
Now the primary questions become; how can we gauge the health of this rally and what are the danger signs that would suggest that the rally is in trouble? For this we can look to my work with the seasonal cycle.
Historically the seasonal cycle averages about 11 months in duration. Given that the last seasonal cycle bottomed in April of 2003 we can set an expectation that the next low should ideally occur in or around March of 2004. Now let me show you how we can use my seasonal cycle work in gold to monitor the health of the current rally.
I found that 76% of all seasonal cycles that top in 5 months or less decline below the previous seasonal cycle low. If we apply this finding to the current rally, we find that gold must continue advancing north with the current seasonal advance carrying beyond September 2003. Should this happen, we could then expect to see the next seasonal cycle low, which is ideally due in March 2004, hold above the April 2003 seasonal cycle low. However, failure of the current rally to advance beyond September 2003 would indeed be a sign of trouble. Should this occur, we can say that based on the historical seasonal work, we would have a 76% probability of seeing the next seasonal low take gold down below the April 2003 seasonal low, once the cycle turns down.
Another piece of information that I can share with you on my seasonal gold work has to do with the price advances of the seasonal cycle. I found that the average advancement for seasonal cycles that have managed to advance at least 6 months is 53.54%. If we assume that this advance carries for at least 6 months and the advance is average, the estimated target for this seasonal cycle would be $491.02. My seasonal analysis also shows that the largest advance for a seasonal cycle that topped out in 6 months or more was 279.57% and the smallest advance was 12.47%. If I take these two extremes out of the equation, the average advance for this bullish group of seasonal cycles is 38.18%. An advance of this magnitude would take gold to $441.89. So, this provides us with another tool that can be used to gauge the health of the current advance. In other words, based on the historical averages, a normal bullish seasonal cycle advance is expected to advance some 38% from the previous seasonal low. Anything less is of course, below average and indicative of a somewhat weak bullish seasonal cycle.
My seasonal work also has a bearish side that we must monitor as well. I found that 85% of all seasonal cycles that fail to advance beyond the previous seasonal cycle top, decline below the previous seasonal cycle bottom once the seasonal cycle turns down. In other words, for the cyclical structure to remain bullish we must at least see the February high at $390.80 exceeded and this needs to occur after September.
I hope that you can see how important the cyclical statistics can be. This work helps to outline general expectations that we can use in order to monitor the health of any given rally. I have now outlined the benchmarks above. Failure to measure up will likely have long term bearish implications. If gold does measure up, then we know that based on the historical averages, all should be bullish. We now just have to monitor the progress of the rally and see how it all unfolds. It is by way of my newsletter, Cycles News & Views, that I try to help people understand and time these important turning points. For more information on myself, the newsletter, subscriptions, other articles, interviews, subscriber reviews, etc. please go to www.cyclesman.com or call 318-342-9038.
