Cycles within cycles

Since times immemorial, man has been a witness of the cyclicality of nature and of life. It starts with your pulse, your heart beat, the pace of your breathing, the daily sun sets, the tides and the moon, the seasons etc, a surrounding all encompassing cycle of births, growth spurts, maturity and decay, all dictated by the same thermodynamic law of entropy, a booming spark of chaotic energy that eventually gets diffused into orderly cold matter.

This same universal clock of ascending and descending energy is at work in markets and is what the great technicians Charles Dow, Ralph Nelson Elliott and William Gann have described over centuries. 

They too noticed the fractal nature of market cycles, made of long ascending and descending primary trends, themselves made of ascending and descending intermediary trends, themselves made of smaller trends etc. In brief, cycles within cycles. 

This dialectical historical mechanics is the way of the Tao or what was described in the Chinese "book of change", the I Ching, some three thousand years ago. 

If one can imagine that something came out of nothing, and eventually morphed into everything and that everything changes, then the truth of the universe lies in this universal mechanics of change. The word universe itself says it all: it is both one (uni) and it changes (verse). Even the word verse as a poetic vibe to it, as it implies some kind of harmonic word order. 

The way of Tao is reversal. At the core of the I-ching is the concept of the Yin and Yang, whereby each state embeds the seed of its opposite state. There is no life without death, the same way there can be no light without darkness etc. Energy is chaos and order is mass. Both are the two sides of the same universal coin. For the investor, energy is the chaotic information, which the market will digest order into the price action. Once all of the information is in the price, there is equilibrium and no more value to be extracted. But because prices are the weighted average of all of the future scenarios and because the future is by definition is uncertain  the odds of the future change all the time), price movements are thankfully in a constant state of flux, thereby creating the information gaps that make a market.

This means that analysing markets and cyclical mechanics (or quantum thermodynamics) can be approached the same way.

There can be no buyer without a seller. A buying impetus would drive the price higher. A selling impetus drives the price lower. A balanced impetus keeps the prevailing trend or lack of trend unchanged. An overly dominant impetus would sow the seeds of its demise and will force an eventual reversal (too much of a good thing..), which is the only constant in markets is change. 

But even if the sparks might be random and seemingly chaotic, they do eventually follow the laws of large numbers or mean reversion into a relatively orderly pattern of ascending and descending energy that permeates several dimensions and layers of time. As a result, any prediction must be approached within a multi-dimensional puzzle of cycles within cycles, which sometime counteract each other and sometime reinforce each other. 

This is effectively what we have described in our previous posts, which showed long macro economic oscillations throughout several time lines. 

A random buy and sell process eventually drives a weekly pattern. This weekly pattern will eventually drive a ten day oscillation pattern, which will then drive a twenty day move, which will then produce a month a half, a three month, a seasonal cycle, a yearly cycle, a business cycle, a presidential cycle, an Armstrong cycle, a Ku generational cycle, a Benner cycle and a Kondratieff cycle etc. So here you have it, a constant flux of fractal patterns that underpin the core behaviour of most cyclical patterns, be it psychological, macro-economic, bottom-up or technical.

Whether you are looking at a simple accumulation distribution technical pattern or at an information adoption pattern. It follows the same pattern.

The first buyer would see something that the majority does not see. Then, if proven right or convincing enough, others will adopt his/her views which will change the momentum and create a new trend, then the majority will feed the trend, until everybody agrees. At which point, something will change again, which will drive a break in the trend and a reversal. 

Markets are information digestion processes. They fluctuate. The randomness of price moves on a short term basis are like the randomness of electrons in a quantum system. Although it suggests everything is possible in markets and that every predictions must be taken with a pinch of salt, it does however mean that, like in the universe, the larger the contextual scale the more predictable events are.  

There are several implications for investors. 

• The first obvious one is that investors must invest for the long term. 

• The second is that it does not pay to predict, but it is worth focusing on the cyclical nature of things in order to prepare for the eventual changes that will occur. 

• The third one is that in order to thrive investors must learn to separate what is useful non random cyclical information bits from the random noise. 
• The fourth one is that because signals can be noisy, it pays to look at investments from different angles. 

This post highlighted the importance of using different time horizons in order to fully appreciate the historical context of a cycle. But looking at cycles within cycles also involves looking at how perception cycles (behavioural/technical factors) and fundamental cycles (bottom up and top down) interact to eventually in-form a price.