Technical Analysis Tools— Cycles

Technicians have noted recurring cycles of various frequencies in the capital markets.

Kondratieff Wave (K Wave): Western economies had a 54-year cycle.

18-year cycle

Decennial Pattern

Years ending with a 0 have had the worst performance, and years ending with a 5 have been by far the best.

Presidential Cycle

Years are grouped into categories on the basis of presidential election.

The third year is the year prior to the next election, and shows the best performance.

Election years usually positive.

Post-election years and the midterm year have the worst performance.

Problems with long cycles:

small sample size

the data do not always fit the cycle theory

[Practice Problems] Based on the decennial pattern of cycles, how would the return of the Dow Jones Industrial Average (DJIA) in the year 2015 compare with the return in 2020?

A.   The return would be better.

B.   The return would be worse.

C.   The answer cannot be determined because the theory does not apply to both of those years.

[Solutions] A

The decennial pattern theory states that years ending with a 5 will have the best performance of any of the 10 years in a decade and that those ending with a zero will have the worst.