Friday, April 23, 2010

7.25 Years Or 3.5 Years?

Bob Prechter has put out a new cycle analysis pointing to a 7.25 year cycle. I hate to disagree with him, but I don't think there is any such thing.

There are 3.5 year, 3.75 year, 5 year, and 7 year cycles which are subharmonics of longer cycles. The interplay of the 3.5, 3.75 and 5 year cycles gives rise to the illusory 4 year cycle, which seems to be very evident for several periods and then seems to fade out for a time, as it has right now.

I pointed out in March of 2009 that the 3/9/09 low was probably the beginning of a new 3.5 year cycle, which was why I believed that the rally would last well into this year, and why we should expect some sort of low in late 2012.

There is also a 20 month cycle which should bottom late this year, around November or December after the current rally tops in earnest. It will only be after we see the form of the decline that we can know whether or not the bear market has returned. The low late this year will have everyone talking about the 4 year cycle low and the continuation of the "bull" market. Don't fall into that trap. Yes, we will see a rally next spring, and maybe new highs, but it will still be part of a bear market rally that will eventually give way to a retest of the 2009 low.

Long cycles tend to have double tops. The biggest double top in history occured in 2007, but the actual 42 year cycle "high" was in March of 2003, appearing as the 21 year cycle low between the two tops. Part of the reason that even with the devastating decline that we had in 2008 the markets have been generally up is that we are on the front side of that 21 year cycle. It is due to peak around 2013/14, which should mark a low between two more tops of lesser degree.

So what does all this mean? It means that the stock markets will be making huge swings for another decade with the final decline not likely to occur until the end of the upcoming decade or the early 2020s. It means that Dow 4000 or lower is not likely to be seen for several more years. It means we have a lot of great trading ahead of us if we can learn to follow the trend and not get bogged down by a particular wave count that may or may not be right. It means that there is a great deal more economic turmoil to come, and we should be prepared for that in our personal finances and businesses.

What about the wave count? I'll have more to say about that after we see an intermediate top which is coming soon, but one thing is for sure. We have more rally to go this summer, and shorting this market has not worked for some time. Traders would probably be better served by not trying to short the coming top, but by taking a break and looking for new long opportunites for the summer rally.

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