same manner and in the same length of time to the low it started from, we will say it has completed one "cycle." If it repeats this action, completing the next cycle in the same length of time as before, i>rt wDl call it both cyclic and periodic. The principal characteristic with which we will be concerned is the time required to complete one cycle, which we will call the "duration" of a cycle. The entire cyclic activity will be referred to as a "component."

Item A of Figure III-l is a representation of an ideal periodic-cyclic motion. Variations from this ideal are possible and will be discussed as we go along.

THE SUMMATION PRINCIPLE

Cyclicality in price motion consists of the sum of a number of (non-ideal) periodic-cyclic components. This is the first element of our cyclic "sub-model." Now. What do we mean by the "sum" of such fluctuations? Any desired number of such cyclic components, each of which differs from the other, can be visualized. But the differences must be found in one or more of three descriptive quantities:

• The magnitucle or size of the motion (as measured from peak to trough).

• The length of time required to complete one cycle-or the duration.

• The relative positions in time of one motion with respect to another.

Two such waves (and a straight line), differing from each other in one or more of the three ways described, are shown in Figure III-2, where the two periodic-cyclic components are identified as A and C. Now at each point on the time scale, simply add the vertical size of the two waves (and the straight line) at that moment and plot the result. This is the shape of Figure III-3. You have accomplished the process of summing two cyclicalities and a straight line. Any number of such fluctuations may be so added together to get a new, composite wave form. You will be going through this process over and over again in the cychc analysis of your stocks-and should become thoroughly familiar with it. This is the manner in which "X" motivated cyclicality combines in the price motion of stocks.

THE COMMONALITY PRINaPLE

Summed cyclicality is a common factor among all stocks. This is the second element of the cyclic model. Commonality of cyclic price motion is expressed in several ways;

• Cyclicality exists in the price motion of all stocks.

• The cyclic components in each issue have similar durations.

• The highs and lows of fluctuations are time synchronized,

• The relative magnitudes of cyclic components are similar in all issues.

These four statements are part of the principle of commonality.

THE VARIATION PRINCIPLE

Price motion is different from issue to issue primarily because of differences in the 75% of underlying fundamentally inspired movement. However, a secondary

source of differences arises from variations from commonality in the cyclic action. Each cyclic component varies from the ideal in that magnitude varies slowly as time passes. As magnitude increases, duration also increases. As magnitude decreases, duration also decreases. This concept of cyclic magnitude-duration fluctuation is the third element of the cyclic model.

In addition to this primary source of variation, deviations from commonality also contribute to differences from issue to issue. The most important such deviations are as follows:

• Relative magnitudes and dmations of cyclic components differ slightly from issue to issue.

• Time synchronization is not perfect. A cyclic high or low in one issue wffl not necessarily occur at exactly the same time as in another.

• Several components may tend to dominate in a given issue at a given time, while others may dominate in other issues at the same time.

These statements are part of the third element of the cyclic model.

THE NOMINALITY PRINCIPLE

The effect of the variation principle is to force the use of a nominal cyclic duration in the quantiQcation of the cyclic model. These nominal durations are an element of commonality, and the deviations from these over a given range are the expression of the principle of variation. The nominal durations of the principal cyclic components are:

Table -1 Years Months Weeks 18 9

4.5 3.0

1.5 18 1.0 12 .75 9

* .50 6 26

* .25 3 13

1.5 6.5

.75 3.25

.375 1.625

*The 26- and 13-week components often appear in data as a combined effect of 18-weelc nominal duration.

This tabulation is the fourth element of the cyclic model.

THE PROPORTIONALITY PRINQPLE

The greater the duration of a cyclic component, the larger its magnitude. The nominal relative relationship between these quantities is as shown in Figure II-1.

FKSURE a-i

2 3

COMPONENT DURAtlON.-YEARS

~io II a t3 »4 a 18

Hie Magnhude-DuiatioQ Relationip

This statement and chart constitute the fifth and final element of the cyclic model. And now you have a price-motion model!

You should read and re-read the features of this model until every aspect is burned deeply into memory. The more or less mechanical timing techniques to be presented based on this model wUl not in and of themselves be sufficient to assure successful trading operations. Your degree of attainment of results will hinge in large part on your ability to resolve ambiguities via your understanding of the elements of price motion!

For convenience, the elements of the price-motion model are compactly assembled as follows:

I. Random events account for only 2 percent of the price change of the overall market

and of individual issues. . National and world historical events influence the market to a negligible degree.

III. Foreseeable fundamental events account for about 75% of all price motion. The effect is smooth and slow changing.

IV. Unforeseeable fundamental events influence price motion. They occur relatively seldom, but the effect can be targe and must be guarded against.

V. Approximately 23% of all price motiori is cyclic in nature and semi-predictable (basis of the "cyclic model").

VI. Cyclicality in price motion consists of the sum of a number of (non-ideal) periodic-cycUc Vaves" or "fluctuations" (summation principle).

Vn. Summed cyclicality is a common factor among all stocks (commonality principle). Cyclic commonality expresses as follows: