SevenSentinels.com

Market Trends Explained

SevenSentinels.com

Context is Everything

Cycles {or trends if you'd prefer} are the primary organizing factor within equities markets price movement over time. When you look at a chart of the Dow Jones Industrial Average or the Standard and Poor's 500 Index, for example, price movements appear random. The market goes up; the market goes down; the market goes sideways.... and some will tell you that you cannot possibly know what it is likely to do next. But they are wrong. Market movements aren't random. Markets are organized, they are regular, they are repeating. And the primary organizing elements are called cycles. You can learn to appreciate how these cycles run and repeat, and most importantly, you can learn to go with, rather than fight, these cycles.

Round, like a circle in a spiral
Like a wheel within a wheel
Never ending or beginning 
On an ever spinning wheel....

Here, for example you can see just one simple organizing element- the very strong tendency for the market to bottom out every four years, in the non-presidential election year in the US. In ten of last 15  four year periods, the four year time span has nearly precisely pinpointed the cycle bottom :

Chart courtesy of DecisionPoint.com

Below we see the Dow Jones Industrial Average for the past 110 years, and if you look closely, you can identify the 20-year secular bull and bear phases:

And here we can see the cyclical bull and bear markets of the past 15 years:

And looking at the 8 and 34 for week moving averages, the crosses of the shorter one above and below the longer moving average identify the onset of the cyclical bull and bear markets:

We shall look at these organizing factors and demystify this seemingly "random" set of market moves, so that you, the trader, can make sense of the markets' regular and repeating trends. Once you understand the market in terms of its various cycles and learn to trade with the trend, you will experience a "quantum leap" in trading performance.

The concept of the Seven Sentinels is my own and is based on a very simple but universal principle that I've observed in nature, everywhere I look, since I was a child - and that principle is that internal proceeds external. The Seven Sentinels are internal measures of building pressure and impending market thrust. External price movement follows this building pressure, just as exhaling follows inhaling, or a volcano follows the build up of gases below the Earths surface, or a Tsunami follows a major earthquake. 

Below you can see the onset of short term trends identified by Seven Sentinel Buy and Sell Signals:

Though analysts have identified longer term market and economic cycles, some lasting hundreds and even thousands of years, as well as shorter term trends that one could track down to seconds if he wished, the time cycles that are most important to a serious trader are the following:

 1.    Super Cycle, AKA the Secular Trend, AKA the "20-year" cycle

2.    Primary Cycle, AKA the Bull Market/Bear Market Cycle, AKA the "4-year cycles

3.    Intermediate Term Cycle, AKA "prevailing trend" typically several months.
4.    The Short Term Cycle which usually runs a few days to weeks
5.    The Very Short Term Cycle, usually minutes or hours

Of these, the one that has the most influence on trading success, in my opinion, is Number 3- the Intermediate Term Trend. The Seven Sentinels were developed precisely for the purpose of identifying the Intermediate Term Trend turning points, and keeping the trader in synch with the "prevailing trend". Once that is accomplished, trading success becomes relatively assured, assuming, of course, that the trader employs effective self control, discipline, and money management techniques which are talked about elsewhere on this site.