How to Trade Market Cycles

08/22/2011 8:00 am EST

Focus: STOCKS

Jeff Greenblatt

Director, Lucas Wave International, LLC

Market cycles are reliable indicators of important turning points, and Jeff Greenblatt explains how to analyze them and why even the pros can miss signals if they aren’t paying close attention.

One of the things investors and traders need to be aware of are market cycles. Our guest today is Jeff Greenblatt to talk about how we can do that. So Jeff, first of all, what is a market cycle?

A market cycle is the same thing as a business cycle, where markets vacillate from extreme optimism to extreme pessimism, and they move according to a universal order, which we can time according to Fibonacci and Gann cycles from point A to point B.

Alright. So, why are they important to me as a trader in terms of my decision making?

Because they dictate when the markets are going to turn. For instance, we had a very important high in the crude oil market back in May. Now, there was a hedge fund in England—who these are supposedly the smartest guys in the room—and suddenly the market turned violently, and they lost $400 million in one week. 

Well, these things can happen. That’s fine. But supposedly, the smartest guys in the room when they were interviewed went on a Dow Jones Report three days later $400 million down, the market is crashing, and these guys didn’t even have an idea as to why it happened.

I won’t say it was simple, but had they been cognizant of the market cycles, they would have realized that the oil market topped on almost a perfect Fibonacci cycle, and on a continuation chart, oil was 609 days off its bottom from the 2008-2009 sequence.

It topped on day 609, and that was also correlated to a perfect square of 9 on a Gann. So, what happened was price and time squared at the right point, and that’s where the market turned. 

Now, had they been aware of it, they could have taken precaution and become defensive leading up to that, or at least they would have understood what was happening.

So on a chart, what do I need to be looking for to protect myself from something similar. Is it just Fibonacci and Gann together?

Well, on a chart, what you always need to be aware of is a count of the number of days or weeks or whatever it is you’re trading based upon how far away we are from the high or the low.

And what am I looking for in terms of that number?

You’re either looking for Fibonacci numbers like 55, 89, 144, 233, and so on; or you’re looking for the “golden spiral” numbers like 61, 161, 261; or in a geometric sense, you’re looking at divisions of a 360-degree circle, like 45, 90, 180, 270, 360.

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