Detrending Price Oscillator Good Indicator For Cycle Analysis

DPO Identifies Extreme Deviating Peaks - Cycle Reverberations - Cycle Deviations

The problem with guru predictions is that most of the time those predictions are not reliable. The problem with depending on standard cycle theory such as the stock market has a four year cycle, is that technical and fundamental traders often prepare too early for the end of the market cycle. Such is the case for this current Bull Market which is now completing its fifth year. Too often traders assume that cycles are set in stone, and that the years of a cycle are reliable.

Unfortunately cycles are rarely precise with the yearly average that cycle theorists use to determine the average duration of a stock market, business, or economic cycle. As an example the four year cycle can be as short as 1.6 years or longer than 6 or even 7 years in duration.

Technical traders require a far better solution to determine when a cycle peak is has occurred. Especially critical is the ability to determine if a major Cycle Deviation has occurred, which tends to precede most Bear Markets that last many months to years.

The Detrending Price Oscillator DPO indicator is an excellent tool. All technical traders should incorporate using it in their cycle analysis for the overall stock market, and major indexes such as the Dow, NASDAQ, S&P, Russell, as well as others. It is also highly useful for Industry and Sector Cycle analysis. In addition it can also warn of Extreme Deviating Peaks™ for individual stocks.

Below is the chart of the NASDAQ Composite Index showing 6 years of data on a weekly timeframe. The DPO clearly indicates in advance of major and minor peaks, and is particularly useful in identifying Extreme Deviating Peaks as indicated on the chart.

The DPO indicator removes the trend of price, to reveal the cycle within that trend.

The value of the DPO is not in daily analysis, but for longer term cycle analysis. Since this cycle indicator tends to lead price it is highly useful for all trading styles, to monitor the risk of a deep correction or Bear Market, and to evaluate the extent as well as severity of speculators buying a stock or index.

It is versatile and is easily adaptable to weekly or monthly time frames, where cycles are present. It is not intended to be a short term trading indicator. However knowing in advance that a cycle has not only peaked but has formed an Extreme Deviating Peaks, gives a trader time to prepare and change trading styles, parameters, and indicators before price turns.

Most of the time technical traders employ the “knee-jerk” reaction to trading. Rather than planning and preparing in advance they simply react to news and intraday, or day to day trigger action by High Frequency Traders HFTs, professional trader runs, and smaller funds Volume Weighted Average Price VWAP orders. To have superior results trading, a technical trader should strive to use all the resources and tools available that allow for a deeper understanding of what is going on.

Cycle analysis is an important aspect of stock trading. Learning to identify the difference between a normal cycle and Extreme Deviating Peaks is just one of many patterns to learn. Cycle Reverberations™ are another cycle pattern that provides valuable information about the strength and durability of the current cycle. Reverberations often occur on a regular basis after a major Extreme Deviating Peak.