Cycle indicators are oscillating indicators that can be used to analyze market cycles. According to cycle theory, stock markets have a tendency to move in cyclical patterns from periods of bullishness to periods of bearishness and back to periods of bullishness. These cycles are repeated with a regularity that allows them to be used to anticipate price changes at key cyclical intervals. However, shorter cycles are present in shorter time frames with smaller cycles operating within larger cycles. It is this phenomenon that makes cycle analysis difficult as at any moment a shorter cycle may be moving upward while the larger cycle is moving downward.
Fortunately, there are several cycle indicators, such as the Commodity Channel Index (CCI) and the Detrended Price Oscillator (DPO) that can be used to analyze the cyclic nature of securities and stock markets.
Commodity Channel Index
The Commodity Channel Index (CCI) is a leading cycle indicator developed by Donald Lambert to identify the cyclical movement of commodities but it can also be used for stock, forex, futures and other securities. The CCI compares the typical price of a security to its simple moving average (SMA) and plots the result as an oscillating percentage.
Lambert recommended that a third of a complete cycle be used as the period for the CCI. Thus, if the cycle takes 60 periods to complete, then a 20-period CCI would be recommended. Once you have determined the period ...
Detrended Price Oscillator
The Detrended Price Oscillator (DPO) is a lagging cycle indicator that can be used to identify the cyclical movements that underlie price action by removing the trend from the price action. This makes it possible to identify the cyclic highs and lows, the cycle length, and the overbought or oversold levels that are usually obscured by the overarching trend. The DPO accomplishes this by removing the trend using a simple moving average (SMA) that is displaced backwards.
It is important to remember that because the DPO uses a displaced SMA, it is not an ...