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The following report was published on 10/24/98 and last updated on 9/24/2004.

The 4-Year Cycle in the Stock Market
....A Special Report by Walter Bressert... Updated from time-to-time since 1982.

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The order of the Universe shows in the thousands of cycles observable in nature and documented by the non-profit Foundation for the Study of Cycles. It shows in the minute structures of molecules, atoms, and subatomic particles. It also shows in the ordered structure of the solar system and, as scientists are now discovering, in the inter-relationships of galaxies. The smallest particles to the largest clusters of galaxies follow patterns of recognizable order... so why not the markets?

Prices move in a manner that may initially appear to be random movement, but with study show an underlying order. Cycles, waves, Gann squares, angles, Fibonnacci relationships in both time and price, and other observable phenomena are reflections of this underlying order. Unfortunately, we do not know its causes, nor do we have a solid grasp of the rules. But anyone who studies the markets with an open mind will see that there is indeed an order to all markets, especially in the formation of highs and lows, which are the focal points or high energy levels of a market.

Market cycles are not oscilloscope exact; they contract, extend and sometimes skip a beat. But cycle tops and bottoms can be identified with 70-90% probability.

It is fundamentals that move the markets, but unfortunately the fundamentals are almost always the most bullish and most tempting at tops, and the most bearish at bottoms. We do not want to buy tops and sell bottoms, but without a study of the markets we are often oblivious to when tops and bottoms are being made. True we do not know all of the rules of the markets, but we do know that we want to buy bottoms, and sell tops. We also know that using technical tools and money management, we can rack up sizeable profits by trading with trend.

Fortunately for us, the energy of the markets is visible in price movement, which show repeating patterns. Market oscillators reflect this energy as overbought and oversold levels. More often than not, these overbought and oversold levels are also cycle highs and lows. By identifying the lengths of the most powerful and consistent cycles, called dominant cycles, we can often anticipate tops and bottoms as well as the direction of the trend, or longer cycle.

The 4-year cycle in the U.S. Stock Market can be traced back to 1789, and is the dominant longer-term cycle affecting the stock market, setting trends that often last for three or more years.

Table A lists the 4-year cycles since 1917, based on the daily close. The column headings are self-explanatory. The averages at the bottom of the chart show that the 4-year cycle averaged 48 months from low-to-low, 37 months from low-to-high, and 12 months from high-to-low. The average advance from low-to-high was 107%, or more than a doubling of the level at which the cycle began.

Table A
4-Year Cycle in DJIA 1917 to 2004 (Based on Closing Prices)

Averages, however, are not very helpful in defining a market, so let’s look at a market qualifier — those cycles that exceeded the high of the previous 4-year cycle versus those that did not exceed the high of the previous 4-year cycle. As you can see in Tables B and C on the next page, there is a distinct difference between those cycles in Table B that exceeded the high of the previous 4-year cycle and those cycles in Table C that did not.

Column 3 of both tables shows the % Advance from the low of the cycle to the high. The average %Advance in Column 3 of Table C is grossly distorted by the 373% rise from the 1932 depression low. The average advance with this cycle omitted is only 46%, less than half of the 112% rise for those cycles in Table B that exceeded the previous cycle high.

Table B
DJIA Exceeded High of Previous 4-Year Cycle High

 

CALCULATE 4-YEAR CYCLE TOPS AND BOTTOMS
OF THE S&P INDEX

To calculate the next top and /or bottom of the four year cycle in a bull market (a cycle that exceeds the high of the previous four year cycle), follow the steps below for either the DJIA or the S&P Index.

1) To calculate the most probable time of the cycle top, from the most recent 4 year cycle bottom, calculate the time period 31 to 50 months from the cycle low, in which 75% of the highs occurred. (Derived from Table B, Column 5.)

2) To calculate the most probable price range for the top of the 4 year cycle, calculate a percent rise of 66 to 85% from the low close of the cycle. Twelve of 13 years reached or exceeded 66% as the cycle topped, and six years exceeded 85% rising 103% to 250% — a broad range, but one that gives precedence for a sizeable move to occur. (Derived from Table B, Column 3.)

3) Also calculate the percent rise above the high close of the previous 4-year cycle top by calculating a percent rise of 33-51% above it, which was reached by 9 of the 13 cycles, and look for an overlap of the two price levels (from 2 and 3). (Derived from Table B, Column 8.)

4) Calculate the bottom... To calculate the expected time period for the next 4-year cycle to bottom, from the most recent cycle bottom calculate 38 to 56 months, the time period in which 12 of the 13 cycles bottomed. (Derived from Table B, Column 4.)

Also, the cycle bottom is most likely to occur 1 to 8 months from the cycle top, which occurred in 10 of 13 cycles. (Derived from Table B, Column 6.)

5)To calculate the most probable price range for the cycle bottom, calculate a 10%, or 17-36% decline from the high close of the cycle, which occurred in 11 of the 13 cycles.(Derived from Table B, Column 9.)

6) Also calculate the % retracements of 24 to 63%, which occurred in 10 of the 13 cycles. The remaining three cycles retraced 74%, 88%, and 113%. Next, calculate the range by subtracting the low close from the high close.

Then, multiply the range by 24% and 63% and subtract each from the high to get the retracement objective. Watch for the cycle to bottom in this price retracement objective, overlapping with the objective in 5. (Derived from Table B, Column 10).

If prices drop lower, multiply the range by 74, 88 and 113% and subtract each from the high to get the lowest retracement objective. (Derived from Table B, Column 10).

What about a Bear Market, in which the low of the previous 4-year cycle is taken out?

A close below 64% would indicate the previous cycle bottom is likely to be taken out either as the current 4-year cycle bottoms, or the next 4-year cycle bottoms. However, a close below 64% is most likely to occur after prices fail to exceed the high of the previous 4-year cycle, which is not the pattern for the current cycle. This pattern of failure to exceed the previous top followed by a decline below the previous 4-year cycle bottom occurred following the 1929 top. Table C shows that there was only a five month rise to the next 4-year cycle top, which retraced 52% before tanking into the 1932 bottom.

CALCULATE 4-YEAR CYCLE TOPS AND BOTTOMS
OF THE DJIA INDEX

To calculate the next top and/or bottom of the 4-year cycle in a bull market (a cycle that exceeds the high of the previous 4-year cycle), follow the steps below for the DJIA Index.

1) To calculate the most probable time of the cycle top, from the most recent 4-year cycle bottom calculate the time period 31 to 50 months from the cycle low in which 75% of the highs occurred. (Derived from Table B, Column 5.)

2) To calculate the most probable price range for the top of the 4-year cycle calculate a percent rise of 66 to 85% from the low close of the cycle. Twelve of 13 years reached or exceeded 66% as the cycle topped and six years exceeded 85% rising 103% to 250% — a broad range, but one that provides precedence for a sizeable move to occur. (Derived from Table B, Column 3.)

3) Also calculate the percent rise above the high close of the previous 4-year cycle top by calculating a percent rise of 33-51% above it, which was reached by 9 of the 13 cycles, and look for an overlap of the two price levels (from 2 and 3). (Derived from Table B, Column 8.)

4) Calculate the bottom... To calculate the expected time period for the next 4-year cycle to bottom, from the most recent cycle bottom calculate 38 to 56 months, the time period in which 12 of the 13 cycles bottomed. (Derived from Table B, Column 4.)

Also, the cycle bottom is most likely to occur 1 to 8 months from the cycle top, which occurred in 10 of 13 cycles. (Derived from Table B, Column 6.)

5) To calculate the most probable price range for the cycle bottom, calculate a 10%, or 17-36% decline from the high close of the cycle, which occurred in 11 of the 13 cycles. (Derived from Table B, Column 9.)

6) Also calculate the % retracements of 24 to 63% or 50 - 63%, which occurred in 10 of the 13 cycles. The remaining three cycles retraced 74%, 88% and 113%. Next, calculate the range by subtracting the low close from the high close.

Then, multiply the range by 24% and 63% and subtract each from the high to get the retracement objective. Watch for the cycle to bottom in this price retracement objective, overlapping with the objective in 5. (Derived from Table B, Column 10).

If prices drop lower, multiply the range by 74, 88 and 113% and subtract each from the high to get the lowest retracement objective. (Derived from Table B, Column 10).

What about a Bear Market, in which the low of the previous 4-Year Cycle is taken out?

A close below 64% would indicate the previous cycle bottom is likely to be taken out either as the current 4-year cycle bottoms, or the next 4-year cycle bottoms. However, a close below 64% is most likely to occur after prices fail to exceed the high of the previous 4-year cycle, which is not the pattern for the current cycle. This pattern of failure to exceed the previous top followed by a decline below the previous 4-year cycle bottom occurred following the 1929 top. Table C shows that there is only a five-month rise to the next 4-year cycle top, which retraced 52%.

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*Rounded to the nearest 100.

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