One of the most powerful aspects of cycle-based trading is the ability to use specific cycles based on a stock's historical trends (its 'DNA') to not only maximize trends but also to sidestep extended consolidation zones and minimize drawdown. For instance, technology stocks with high trading volume and tremendous public interest (the usual suspects: NVDA, AMD, NFLX, META, etc.) consistently operate within our dominant swing cycles: TM-2 (3.5 Months), TM-3 (5-7 Months), TM-5 (12-15 Months), and TY-1 (1.5 Years) cycles.
Knowing this and recognizing the upcoming setup can give you the capacity to avoid downtrends and keep your money in cash, waiting for the next inevitable bottom, or reallocate it to another stock primed for the start of a new up-cycle.
Long-term trends in high-growth stocks can yield tremendous gains over many years and even decades if you are invested in the right stock of a well-run company. Utilizing these cycles for stocks like AAPL, MSFT, GOOGL, and a few others can be an excellent strategy to hypercharge your stock returns by avoiding, or at least minimizing exposure to, the 'boom-bust' cycles that are inevitable characteristics of high-performing stocks.
After a huge run-up in Microsoft stock during the 1990s tech bubble, the stock took an entire decade to recover from the 'cycle muck.' Buying randomly, for instance, even at the 2009 lows after the big shakeout in 2008 (which most traders were unaware of was a market ripe for a big pullback due to a looming TY-3 cycle coming off of the 2000 peak), would have resulted in four years of choppy performance. Of course, there were also macro-economic aspects in late 2007 going into early 2009 with the housing bubble and defaults on mortgage-backed securities due to lax lending standards dragging the markets down.
It's always interesting to note how these seemingly unrelated macro-economic events align with an expected cycle setup.
The big shakeout in MSFT to the lows of the 2009 bottom ‘looked’ like a ripe buying opportunity and may well have been for the long-term buy-and-hold investor, resulting in a 1600% return over 12 years. However, this return included four years of chop initially inside of the TY-3 Cycle line, followed by a one-year breakout and retest.
Unless you had the foresight to recognize the long-term potential of the stock and were willing to wait it out, those four years of chop may have worn you out and led you to seek greener pastures.
Microsoft's focus on cloud computing played a significant role in the company's stock performance starting in 2013. In that year, Microsoft introduced its cloud computing platform, Azure, which quickly gained traction and became a key growth driver for the company. Azure offered a range of cloud services, including infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS), allowing businesses to leverage Microsoft's cloud infrastructure for their computing needs.
The introduction and subsequent success of Azure helped transform Microsoft's image from a traditional software company to a leading player in the cloud computing market. This shift in perception increased investor confidence and drove up the company's stock price. Furthermore, Satya Nadella, Microsoft's CEO at the time, played a pivotal role in refocusing the company toward cloud computing and implementing a "mobile-first, cloud-first" strategy, which further bolstered investor optimism.
As a result, Microsoft's stock began to rise steadily from 2013 onward, reflecting the market's recognition of the company's success in cloud computing. This positive momentum has continued in the years that followed, and Microsoft has consistently been one of the most valuable and successful technology companies in the world, driven in large part by the growth of its cloud computing business.
This was great news for long-term growth, but momentum traders, who don't take kindly to money languishing unproductively, could have leveraged an understanding of market cycles (specifically TSS Cycles) to wait for a breakout of the TY-3 channel and the inevitable retest of the channel line in the first quarter of 2013, thereby entering the trade and sidestepping the years of chop.
These 'cause and effect' events, such as the completion of MSFT's super-cycle in 2000 and the subsequent shakeout into consolidation lows, provide highly predictable cycle line placement. Knowing where a stock stands within a super-cycle can significantly accelerate your wealth building, as stagnant capital can be costly in terms of lost opportunities, such as other stocks primed for the beginning of NEW super-cycles.
Now, let's shift our focus to AAPL and examine its cycles over a fifteen-year trend.
The general rule for trendline placement is that the deeper the retracement from the prior established highs, the further out in the cycle toolbox is required to catch the next upward turn.
AAPL's 2008 pullback mirrored the weakness in the overall market, with an initial 40% drawdown in the first quarter of 2008, eventually escalating to a 58% drawdown as the TM-3 cycle pushed prices back into the base. The primary advantage of being aware of these cycles is the ability to park your cash in a money market, which is notably easier if you are utilizing a tax-free IRA account.
Overall, during its 15-year trend following the breakout in 2008, AAPL spent six years in pullbacks and stagnant trading capital...
Now, if you are wondering how to determine when a cycle peak is reached and it's time to exit and wait for the consolidation cycle to finish, it can indeed be challenging to get the timing exact and avoid exiting too early. Some of the tools I use include looking for an overheated part of the trend, a 'climactic' move accompanied by increasing volume. Additionally, price congestion near the weekly 35-SMA, which resolves with a northward price movement, can be an indicator for an exit after the next bounce off the weekly 21-SMA.
I also utilize other tools such as TSS channels and Fibonacci extensions. The key point here is that if you have a loose attachment to a particular stock and had the foresight to sidestep one, two, or even three to four years of sideways price action, you would likely find that appealing. After all, there is a wide range of stocks out there beginning their own up-cycles, and being stuck with a multi-year laggard is far from enjoyable.
These long-term charts closely resemble the intraday cycles on much smaller time frames. By studying intraday charts, you can gain valuable insights into the long-term cycles.
Here's to more nimbleness and less being 'cycle-slapped'!
Let’s Rule The Freakin’ Market’s Together!
Paul Lemal
Big Kahuna Trading Club
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