In the Summer of 2001, with the Industrials well above 10,000, I did a research paper that suggested with almost certainty we were about to see a major decline take place in the stock market. Based on history, my study suggested a 100% probability of a move below the 1998 4-year cycle lows as the market moved down into the 2002 4-year cycle low. This did in fact occur as the 2002 4-year cycle lows were made in not only the Industrials, but also the S&P 500, the Dow Jones Utility Average, the Dow Jones Transportation Average, the New York Composite Index, the Russell 1000 and the Wilshire 5000. In my research paper I specifically said that the Dow Jones Industrial Average would close below 7,400 in the Fall of 2002. This documentation was published in the November 2001 issue of Technical Analysis of Stocks and Commodities Magazine. If you would like a copy of this article, please make an e-mail request.
In July 2001 I said the Dow Jones Industrial Average would close below 7,400 in the Fall of 2002. Again, This was published in the November 2001 issue of Technical Analysis of Stocks and Commodities Magazine.
In both my April and May 2002 newsletters I warned that we had a 97% probability, based on history, that the stock market was about to move below the September 2001 lows, which again was proven correct.
In the May 2002 newsletter I warned that I felt the seasonal cycle in the U.S. Dollar had occurred as well as the 4-year cycle top. I further warned that based on my studies of cycles we had a 100% probability of a move below 111 in the U.S. Dollar. Again, this obviously proved to be correct.
In the June 2002 newsletter I stated, "we are about to see the bear market accelerate." This obviously happened as well.
In the July 2002 newsletter I said "If you are still long stocks I would GET OUT." This was a timely call as well.
In the October 2002 newsletter I said "Expect the Bear to get Nasty again as the Dow moves into the 4-year cycle low, due between November 15, 2002 and January 17, 2003. This low should take the Dow below 7,400 and most likely into the mid 6000 range!"
We got the close below 7,400. October 2002 did mark the 4-year cycle bottom, but the mid 6000 range was not seen.
I have also developed a very unique indicator that has become the cornerstone of my analysis in regard to market turns. I call this indicator the "Cycle Turn Indicator." It was originally developed to help identify the 10 and 22-week cycle tops and bottoms in the stock market and it works great. I then found that it works on other markets and even other timeframes. Throughout 2006 and 2007 I used statistical analysis along with my Cycle Turn Indicator to warn my subscribers that the 4-year cycle low had not occurred, that "the 4-year cycle was extending and that the fallout was still ahead." In October 2007 I had a long-term cyclical sell on equities and by November 2007 the Dow theory had confirmed a bearish Primary Trend change, all of which was published in the newsletter and in the short-term updates. I also called the housing top using statistics and the Cycle Turn Indicator in 2005. These same methods were also used to call the low seen in the dollar in early 2008. As commodities approached their tops in July 2008 I warned that they were in parabolic advances and in mid-July issued a sell signal, based upon these statistics and the Cycle Turn Indicator, right when everyone was calling for $200 oil. In fact, I told my subscribers for months in advance that the dollar was bottoming and that the entire commodity complex was in "a parabolic advance" and that parabolic advances were "ending moves." I also gave statistical benchmarks to watch for in regard to this the top in commodities 6 months in advance and in July those benchmarks were seen exactly as the statistics suggested. Again, it was the use of statistical analysis and the Cycle Turn Indicator that confirmed the July top right when many others were calling for $200 oil. My methods told me that a major top had occurred and this too has since proven correct. I also issued a sell signal on gold in mid-July warning subscribers of the decline. Then, as gold approached the September lows I told subscribers that an intermediate-term cycle low was due. The statistics and the Cycle Turn Indicator have proven to be extremely valuable tools over the years.
Author: Tim Wood
Tim Wood is a Certified Public Accountant. He began publishing his market letter, Cycles News & Views, www.cyclesman.com, after writing a cover article in Technical Analysis of Stocks and Commodities Magazine. In that article, he correctly identified the 2000 market top, as well as a subsequent decline that produced the 2002 bottom.
Tim’s background disciplines are accounting and finance. And, he was first exposed to technical analysis during a senior-level college finance course. The course cultivated an interest that motivated him to further study of technical analysis methodology. His investigation of technical methods in the mid-1990’s led Tim to the work of the cycles pioneer, Walter Bressert, who also serves as President of the Foundation for the Study of Cycles. Tim had the honor and privilege of studying extensively under the direct supervision of Mr. Bressert. He was attracted to Mr. Bressert’s methodology by the quantifiable characteristics not found in other technical methods. Tim’s application of these cyclical and statistical based methods allowed him to correctly call the 2000 top and decline into the 2002 low.
During the period from 2000 to 2002, Tim began to study Dow Theory. This lead him to the work of Richard Russell. Mr. Russell helped Tim obtain the original 1930‘s writings by Robert Rhea, the leading Dow theorist of that time. These writings and those of Mr. Rhea’s predecessor, William Peter Hamilton, influenced Tim’s eventual conclusion that there may be a connection between Dow Theory and cycles, despite the absence of an obvious link. Specifically, Tim discovered that the bull and bear market periods in the early days of the market averages were connected to the 4- year cycle. This result was supported by analyses of William Peter Hamilton and Robert Rhea.
Tim was then able to dovetail the two methods, which he uses as complementary tools. So, he is able to apply a quantitative approach to Dow Theory and create a discipline not achievable with Dow Theory alone.
Tim combined these methods to create a technical analysis platform that includes his Cycle Turn Indicator as well as a Direction and Swing Summary.
He uses Dow Theory to profile market direction in conjunction with longer-term cycles to estimate the larger-degree trend. Then, he employs data mining techniques to determine probabilities. Probability analysis, in turn, is used in support of intermediate-term and short-term statistical inputs to cycle analysis. A composite of Primary Indicators is used to generate buy and sell signals with Confirmation Indicators intended to add a level of confidence. A set of Secondary Indicators is used to identify overbought and oversold levels that may suggest the formation of cycle tops and bottoms.
The analytical method is, then, a layered approach. Dow Theory, cyclical data, and statistical probabilities are used to provide expectations about longer-term market direction. Intermediate-term, weekly Primary indicators are used to determine the right side of market position. And, when combined with intermediate-term cycle phasing, weekly evidence serves as a guide for persistence or possible change of longer-term market direction.
Finally, short-term indicators are used to identify intermediate-term turning points.
Tim relied on these methods to warn his subscribers of the housing top in 2005, the stock market top in 2007, the commodity top in 2008, the 2009 low in equities and of the 2011 top in gold. During the 2004 to 2007 period, he maintained that the equity market was stretching into an extended 4-year cycle top. He also contended that the liquidity infusion would only serve to make matters worse during the decline into the 4- year cycle low. This proved correct as the most severe financial decline since the 1930’s followed in the wake of that extended 4-year cycle advance. As the rally out of the 2009 low began, Tim said “the longer the rally lasts, the more dangerous it would become.” He views the current liquidity-induced advance as a contributing factor to an extension of the normal ebb and flow of the 4-year cycle. So, based on Tim’s research, he believes once again, that this will only serve to make the inevitable decline toward a 4-year cycle low even worse.
Tim’s statistical-based analysis has allowed him to identify a common set of high probability occurrences that are typically seen at 4-year cycle tops. The analysis also has historical basis from the similar configuration of stock market tops in the past. Tim has maintained that the advance out of the 2009 low is likely to be a financial train wreck waiting to happen. However, he has also maintained since 2009 that the advance is likely to continue until a cyclical- and statistical-based setup has been completed. And, such a setup will be similar to those formed during other 4- year cycles and major stock market tops. Furthermore, he feels that the current case may develop more extreme conditions than some past instances. So, once his cyclical- and statistical- based setup is in place, we could be facing an even worse outcome than seen in the wake of the extended liquidity-driven 2007 top.
Tim also maintains that a major cyclical bottom in gold lies ahead. Cycles News & Views presents a detailed analysis of the dollar, gold, bonds and other sectors, when appropriate, in its monthly research letters. A subscription also includes web-based updates, which are typically done three times a week.
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