• Existence in all issues

• Similar durations

• Similar relative magnitudes

• Time synchronization

VIII. Cyclic component magnitude and duration fluctuate slowly with the passage of time. In the course of such fluctuations, the greater the magnitude, the longer the duration and vice-versa (variation principle). In addition, issue-to-issue variation expresses as deviation from commonality as follows:

• Deviations in relative magnitude and duration.

• Imperfect time synchronization.

• Differences in component dominance.

DC. Principle of nominality: an element of commonality from which variation is

expected. Nominal cyclic component durations are shown in Table II-l. X. The greater the nominal duration of a cyclic component, the larger the nominal magnitude (principle of proportionality). The relationship between the two is illustrated in Figure IM.

The above ten statements constitute the formal, quantitative, price-motion model. Because of its importance, let us restate the model qualitatively in homely terms for additional clarity.

Visualize a general tendency to change slowly and smoothly because of basic fundamentals. Mix in occasionally a bit of short-term, sometunes quite sharp, price motion due to specific and unforeseen fundamental developments. Conceive of all of this so far as causing about 75% of all price change, but as still being a generally smooth situation (few fluctuations). Now stir in a little random action. Superimpose the sum of 12 cyclic motions totaling some 23% of all price change. Imagine the longer duration elements of this motion as being largest in size also. Cause each of these to fluctuate slowly in magnitude and duration. Now have the whole mix influence human decision-making processes, en masse. The resulting buy and sell decisions terminate in purchases and sales-which in turn reflect changing prices. And there you have it: A simplified explanation (or model) of stock price fluctuations-w A predictive implications!

THE SIGNIFICANCE OF CYCLICALITY

"Stock Prices Fluctuate"

They certainly do and we now know that they do so in a reasonably ordered manner!

Buy Low and Sell High"

The key to transaction timing is in knowing wlien is low and when is high. The price-motion model elements promise us this knowledge-as exact as our ability to untangle the 12 periodicities of the model as time goes along. This can never be done

precisely. However, techniques will be developed in later chapters which convert the imperfect predictions possible mto precise action signals. The expectations for being completely incorrect are about 10%, and even this error factor can be effectively prevented from causing significant loss. The remaining 90% of correct action signals is more than sufficient to bring into prominence the profit compounding principle of Chapter One.

HOW TO GO ABOUT OBSERVATIONAL ANALYSIS

We will now go into the first and most elemental method of determining the status of cyclicality at any given time. This is an essential first step in "predicting" what is likely to occur in the future. This will be done by illustrating key points of the cyclic model. (The remaining elements of the price-motion model are discussed in Chapter Nme and the Appendix.) A dual purpose is served in this approach: you can see for the first time the elements of the model in operation, and the techniques used will be needed later as you analyze the market and individual issues for yourself.

Lets first of all take a look at cyclicality in the Dow-Jones 30 Industrial Average (DJIA). Figure II-2 is a weekly high-low chart of the DJIA from early 1965 through early 1969. Prices have certainly fluctuated during this period, ranging from a high of 1001.11 in February 1966 to a low of 735.74 in October of the same year. Our objective is to extract as much cyclic information as possible from this chart, using the expectations of the cyclic model as a guide.

Price Fluctuations In The Dow Average

Now look at Figure II-3. This is the same chart except that a smooth envelope has been drawn surroundmg the data. Do not be overly concerned just here about the mechanics of constructing this envelope. This will be covered in detail in Chapter Four. Suffice it to say that the envelope is unique and is constructed according to fixed rules. It encloses all of the data on the chart (with the exception of the peak of the action of one week in May 1968), and is uniformly and precisely the same vertical thickness over the entire span of time represented. You will be making much use of such envelopes later because construction of such an envelope is always the starting point for observational cyclic analysis.

Now notice that the envelope boundaries are contacted (or approached closely) by the data only in certain spots. These are identified in Figure II-3 by letters. In short, prices gallop back and forth within the envelope-and the points of actual or near contact represent highs and lows of one of the cyclic components were interested in.

FIOURC -

A Constant-Widdi Envelope: The StartiAg Point In Observadoital Analyse

Continue the analysis by counting the number of weeks between lettered lows. Lows are always preferable for this purpose since you will find them to be better defined than are the highs. The results can be tabulated as shown on the following page.

Notice the decline in duration between points B-C, C-D, and E-F. These are examples of magnitude-duration fluctuation (the variation principle), as expected from the cyclic model. Of the ten cyclic samples available, ignore the obvious variants-and average the remaining seven durations. The result is a nominal cyclic duration of 21.428 weeks. This is the current time expression in the DJIA of the 26-week nominal duration cyclic component of the price-motion model.Nov/ record the variation from