We like to send this overview of the work out to potential clients, as a primer to understanding our system. To understand cycles, you must accept the following: markets do not move at random, and previous patterns from the past will reappear at a predictable point in the future.
Cycle work is a mathematical study based on past events to project future movements. Cycle study is based on the premise that the past repeats in the future.
The farther back Charles can data mine, the more accurate his timing and forecasting can be.
Cycles study tells Charles the following: what, where, and most important – when to look for highs and lows in specific instruments. This allows the thinking trader to visualize how the board of “currencies, bonds, stocks, commodities, etc.” lines up for potentially trend-changing activity.
In effect, we are looking for significant highs or lows.
The Cycle analysis combines with target, Wave and an overall technical model.
There are 200+ indicators in his overall technical model.
When both models line up — meaning that the timing component which is the cycle work synchronized with his overall technical model — Charles gives low risk entry and exit levels. This means that all of Charles’ trades come with definable trade parameters, i.e. stop loss, either break-even or close trailing stops.
Nothing is 100%. However, with the timing component which measures momentum and using tight stops, this is risk management using Charles’ model. It’s important to spend the time reading the dialogue to follow the positions and his thought process.
The timing indicators – meaning the cycles – come in varying lengths – based on daily, weekly, and monthly data. It’s incumbent on the reader to pay attention to the dialogue to see what cycle Charles is looking at. This, combined with a matching target or momentum number, is an indicator of trade potential.
New clients should pay particular attention to price targets for exit zones and potential reversals. Charles puts out major levels during the week. These can be a catalyst for major price rejection the first time in. Shorter term targets generally produce less of a reaction than longer term targets. By watching the price action at these levels, each investor can gauge the best course of action for his own style trading.
Cycles and Interpretation of Events
Over the weekend, we sent out cycle charts that included updates of work on Unemployment and Industrial production.
Before discussing the two charts, we want to give a small introduction on how and why cycles work.
We get many questions which indicate that clients are trying to understand economic change in historic time.
Only detailed historic knowledge can answer most questions. Without it, theoretical analysis is inconclusive.
Looking at the facts of the prior quarter or even half of a century, in our opinion, is quite inadequate.
A period of 250 years is the minimum for the student of the business cycle.
Since the overall developments which are generated by the economic system are cyclical by nature, the task to be accomplished goes far beyond mere descriptions of spectacular breakdowns. We feel that cycles are needed to describe the industrial processes behind them.
The value of so called historical work studying “crises” is impaired by a general lack of interest in scholarship, and a focus on looking for the fast bonus on Wall Street.
What we really found in our work of time series pattern recognition is the predictability of financial markets.
When at Goldman Sachs, I gave classes, trying to convince people with PHDs from Harvard and Cambridge that it is very difficult to make money following the economic textbooks.
Cycles as we define them function in an almost magical way to predict facts and interpretation of facts so they can be used to forecast market movements.
We deliberately mention facts and interpretation of facts separately for the following reason:
Let´s take a situation where one owned IBM for a year and has a big profit.
Let´s say that IBM will come out with a great number tomorrow.
Based on cycles, the stock can go either up or down.
If tomorrow is a cycle low, and IBM shows great results, the stock will go up.
The Wall Street Journal and CNBC and Bloomberg and the other news services will probably write the following: results were great and the market liked it and bought IBM.
If these “excellent” results come out around a cycle high, the stock will go down.
We will probably read the following in the same places: investors took profit, since they do not expect IBM to do better next year.
The facts were the same – but the interpretation of the facts based on the cycles — which most investors were not aware of — would be different.
When a cycle bottoms, most events start being interpreted in a positive way. That causes a bottom to be a bottom.
Conversely, when cycles top, everything seems to start to look bad – which cause it to be a “top”.
Also, an interpretation can change reality.
The perception of a rate hike can do the work for the Fed without a real move, and often, only the expectation of inflation can have an effect.
Therefore, it is possible to get a high inflation number with a surprising concomitant rally in the Bond markets – since the interpretation is the following: that this, for now, is probably the last strong inflation number.
In our work, we feel that predicting the market behavior after economic numbers come out — by studying the past effects of the numbers and the reactions to them – is more important than predicting the number itself.
We will, in our future updates, try and provide an economic outlook based on our cycle work.
Yesterday, we sent out the cycles for Unemployment and Industrial Production.
We see the cycles top for Unemployment, and cycles show a low for Industrial Production only by year end.
Our analysis is that Unemployment has topped, which does NOT mean lower readings immediately.
We feel that it will also take until next year for short term interest rates to bottom out.
Again, when this is based on economic theory, it does not predict market behavior — cycles do, however.
We will also continue to try and make sense of the China factor, since this seems to be what all investors are focusing on.
For now, we want to mention that the inflation in China – according to our cycles — is based primarily on energy and food, and that there still is an underlying deflation danger in the world.
The long term monthly unemployment cycle (Blue), together with shorter term cycles topped.
Based on these cycles, we could expect the job market to slowly recover until 2013
“Almost Economic Piece #2” – With WSJ Article of April 26, 2010, Re Bullish Technical Signals At Top of Market
We are regularly asked about how we derive our economic forecasts in conjunction with our technical model and our cycle model.
We have included the Wall Street Journal of Apr 26, mentioning the reasons why the technical analysts were very bullish.
Wall Street Journal of Apr. 26, 2010
That Apr 26 was the exact day of the high.
Around that time, we also mentioned that “technicals” looked strong.
However, we said the following:
On April 19:
“Even if market conditions seem positive, the fact that there is a cycle high indicates an underlying force that always has to be taken into account”.
On May 3:
“Our overall technical model continues on a buy signal. However, as mentioned before, when cycles turn down, that is a time when anything can happen. Therefore, we are watching closely”.
That “anything” did, in fact, happen, and most markets came down a lot.
We therefore do NOT want to delve too much into our technical model, out of concern that investors might draw the wrong conclusions and underestimate the importance of Cycles.
If we would NOT have consulted our cycles, we could have been caught, as were most technicians, since “technicals” were looking good.
Concerning our economic model, we have tried writing – quite a few times – an Economic Piece #2, as a follow up to Economic Piece #1
However, rather than publish a new piece, we found it best to restate our main point about the power of cycles and targets in the Aussie Dollar example below, since we kept coming up with this point in our “Almost” Economic Piece #2.
Let’s take the Aussie Dollar as an example.
We recently sold our Aussie position around 93.
A while back, we called the Aussie when it was at around 68 to go to around 93.
We are now looking to go long again the Aussie in a few weeks. The economy in Australia is doing very well. Employment is rising. We still expect the Royal Bank of Australia to take rates to 5.50%. In Australia, the fiscal year starts in July. We expect the deficit to narrow to 2.6 % from 4.2% There are, therefore, many positives.
What are the negatives?
Two things that we have called for:
Weakness in Chinese equities, and
Deflationary pressure in commodity prices – and the Aussie is thought of as a “Commodity Currency”.
Therefore, when we try and combine all this to decide what to do with the Aussie, we come back to what we know to do, which is work with price targets and cycles and our other tools.
Then, we will see if the markets show us what “fundamentals” really mean.
We view our cycle work as a “fundamental study”, others do not. They tend to look at cycles as a subset of technical analysis.
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