[2][3]Understanding those personalities is key to the application of the Wave Principle; they are defined below. (Definitions assume a bull market in equities; the characteristics apply in reverse in bear markets.)"/>

Stock Market Cycles: Seven Reasons To Pay Attention

Have you ever noticed how the number seven seems to be a recurring theme in this world?

Here are some examples:

  • There are seven days in a week.
  • There are the Seven Wonders of the World.
  • People should avoid the Seven Deadly Sins.
  • There is a place called “Seventh Heaven.”
  • People sometimes suffer from a “Seven Year Itch.”
  • There are the “Seven Seas.”
  • There are seven visible planets, each ruling one day of the week.

And, yes, thanks to the Elliott Wave Theory, there are seven year stock market cycles.

In reviewing recent stock market activity, I noticed that we are quickly approaching another seven year milestone, and a possible turning point. After performing some research, I found the following information.

Is the 7.25-Year Stock Market Cycle on Schedule?
Knowledge of market cycles can complement Elliott wave analysis

By Bob Stokes
Thu, 03 May 2012 17:00:00 ET

It’s well known that the stock market tends to rise around certain holidays like Christmas and Easter…

… Yet the key word is “tends.”

Markets don’t always conform to seasonal biases — not even to the well known “Sell in May and go away.” Still, an investor might do well to consider the market’s seasonal tendencies.

So it is with stock market cycles.

Some have been nearly like clockwork for decades. With some cycles, however, a market turn doesn’t occur at the exact cycle crest or a market bottom at the exact trough. This may be because longer cycles are influencing shorter ones or vice-versa. In some cases cycles simply vanish. Even so, it can be helpful to have knowledge of market cycles.

…my view of time cycles is that they are transient epiphenomena of the Wave Principle. This means that cycles are not the fundamental regulator of stock prices. They merely show up for a time…Cycles can be quite useful…

Elliott Wave Theorist, April 2010

The study of cycles can complement Elliott wave analysis. Here’s more from that same issue of the Theorist:

The March 2004 issue of EWT postulated a 7-year crisis cycle going back to 1973 and used it to predict another crisis in 2008. Here are the table and the forecast from that issue:

—1973: Arab oil embargo, with spillover into 1974 stock market low of wave IV.

—1980: peak in the inflation rate; top in gold, silver and mining stocks, interest rate spike, stock-market “massacre” and low of wave 2.

—1987: stock market crash and low of wave 4.

—1994: “Republican Revolution;” suspicion of government due to Waco attack (1993), “black helicopters,” etc.; stock market breaks uptrend line at low.

—2001: successful terrorist attack on the World Trade Center; low of wave (3) of 1 [actually 3 of a].

Seven years after 2001 is 2008, so that is the next year to look for an extreme in social fear.

There was certainly a crisis and plenty of social fear in 2008, so this cycle performed as it should have.

Robert Prechter pointed out another cycle in his book At the Crest of the Tidal Wave (p. 462):

The 20-year cycle, which has lasted between 18 and 21 years, produced the dramatic stock market lows of 1884, 1903, 1921, 1942, 1962 and 1982. This cycle projects another low in the year 2002, + or – 2 years.

As we know, the market did reach a bottom in 2002.

Prechter has also informed subscribers about a 7.25 year market cycle. This cycle peaks at the same time as the 20-year cycle. Moreover, because the 7.25 year cycle is shorter, we can narrow the timeframe of what we see as a significant market turn.

Most revealing: the market cycles we’ve noted (in addition to the 34-year market cycle) are dovetailing with our Elliott wave analysis.

Source: elliottwave.com

Elliott wave analysts (or Elliotticians) hold that each individual wave has its own signature or characteristic, which typically reflects the psychology of the moment.[2][3]Understanding those personalities is key to the application of the Wave Principle; they are defined below. (Definitions assume a bull market in equities; the characteristics apply in reverse in bear markets.)

Five wave pattern (dominant trend)

Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and “the crowd” haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.

Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to “get in on a pullback” will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

Wave 4: Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.

Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).

Three wave pattern (corrective trend)

Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.

Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

Source: Wikipedia.com

S&P 500 Chart as of 6/25/2013

If we look at a chart of the S&P 500 we can see that the peak of the left mountain ( a high of 1,553.11) occurred in March of 2000. The peak of the center mountain (a high of 1,576.09) occurred in October of 2007 — a seven year time frame. Now, we are quickly approaching another seven year milestone and the tea leaves appear to be signaling that another shift is coming.

S&P 500 10-Yr. Chart as of 6/25/2013

When we look at a 10-yr. chart for the S&P 500 we notice that the price was able to break above the key resistance level of 1,576.09 (i.e. the high reached in 2007) but it then reversed course and quickly fell back to that level, where it is currently situated.

S&P 500 1-Yr. Chart as of 6/25/2013

If the S&P 500 cannot hold the the current level of support (i.e. ~1,576.00), then it stands a good chance of falling  to either one of the lows reached in 2002 or 2009; thus, once again, showing the uncanny ability of the Elliott Wave Theory to predict future changes in trends.

Though I do not live my life by such theories, I find some of them to be incredibly thought provoking. Presently, there is certainly no shortage of bad news worthy of causing declines in stock prices but, according to the Stock Traders Almanac, the stock market is supposed to end 2013 on an up note. Which prognostic tool will win the day? It’s yet to be determined.

Note: Information for this article was collected from The AnswerBank, elliottwave International, and Wikipedia.com. Charting data provided courtesy of optionsXpress.

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