If you have looked at a stock chart and noticed some patterns, you are likely on to something: Markets often display patterns, although there is usually some variability that can make those patterns hard to see. Cycles are an element of technical analysis which attempt to distinguish a repeating topping and bottoming pattern in stocks. A peak-to-peak cycle can provide you with a time frame for when a stock is likely to top out and begin to reverse. Cycles should be used in conjunction with other indicators and strategies, as they provide a potential time span for reversals, but not exact entry or exit points.
Finding Peak-to-Peak Stock Cycles
Open a chart to the price history of a stock. The more historical data you view, the better, as this will allow you to see multiple peaks in the stock's price. You can access free charts at websites including finance.yahoo.com or FreeStockCharts.com.
Mark each major crest in the stock's price history. A crest is a major peak in the stock price. Sometimes two crests appear very close to each other. Mark the last peak in this case, as that is when the stock ultimately peaked before declining.
Measure the distance, in time, from one crest to the next. Repeat this process until you have measured the distance between all the peaks on your chart. Depending on the time frame you're viewing, the peaks may be minutes, days, weeks, years or even decades apart.
Record the lowest and highest distances between the peaks in price. This will provide you a range of values for forecasting future price peaks. For example, a stock may have taken 13, 15, 16 and 18 weeks to move from peak-to-peak over the last four cycles. From this you can gauge that the next peak could occur 13 to 18 weeks after the most recent peak.
Make a forecast of when the next peak is likely to occur. Add the lowest and highest prior cycle values to the date of the most recent peak. This will provide you with a time frame for when the next crest could occur.
- You can also measure the distance between cycle of lows, commonly called troughs. The measurement between cycle lows can help determine when the stock might bottom and reverse higher.
- Add vertical lines on your chart to mark each major price peak. This will provide you with a visual of the distance between crests in price.
- Note other patterns, such as the tendency of stocks to rise or fall at certain times of the year. These are called seasonal patterns or cycles.
- Cycles are usually not exact. Rarely does a cycle peak at exactly the expected time; expect variability.
- During long-term trends, smaller cycles may be completely ignored. This is because the trend becomes a dominant factor and smaller cycles are overwhelmed, producing little impact on the price.
Cory Mitchell has been a writer since 2007. His articles have been published by "Stock and Commodities" magazine and Forbes Digital. He is a Chartered Market Technician and a member of the Market Technicians Association and the Canadian Society of Technical Analysts. Mitchell holds a Bachelor of Management in finance from the University of Lethbridge.