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32
Chart 6 (below) shows a synthesis of all six cycles: the 8wk, 13wk, 20wk, 40wk, 76wk and 208wk cycles.
At first you would think something has gone wrong because the cycle plot doesn’t seem to match up, but
remember the synthesized cycle is not normalized to price action, which means the synthesized cycle plot
does not necessarily have to overlay price action. The question to ask is whether price moved in the
general direction of the synthesized cycle line during various market moves.
If you look a bit closer, the synthesized plot line and price action have actually tended to move somewhat
in concert, though not perfectly, since 2004. There was a general move up in the market between May,
2004 and March, 2005 along with the cycle plot. Then, the period from March, 2005 to October, 2005
(months not labeled) saw two moderate price declines, without any net upside price progress, while the
synthesized plot line moved from a high to low, dissipating its downside energy in that time frame. Prices
then rallied strongly into the current time frame and the synthesized cycle line has only moved
begrudgingly but it has moved up.
Usually you would like to see closer cycle price correlation than this example, but this example is a good
one to demonstrate since it shows you how to work with cycles even when the analysis is not perfect.
Sometimes a better result comes from selecting the 4 to 5 cycles which more closely match the most
recent couple of year’s price action, call it trial and error. Such harmony usually occurs when you combine
the stronger or more statistically significant cycles. But be careful, since you might ignore the important
influence of other cycles, particularly larger cycles, which can be more dominant than smaller cycles.
In this market, not showing is a 9.2 year cycle which is likely topping this year, and it may be dominant
enough to account for the continued rally in 2006. This chart example also demonstrates why we need
some technical tools to help our interpretation. We will demonstrate some of these tools in charts 8 to 11.
Chart 6
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