The Magic of Cycle-Based Trendlines

If you have spent any amount of time studying technical analysis of stocks, futures, forex or commodities, you already know that moving averages are extensively used by most traders and oftentimes for good reason.

Although moving averages are a lagging indicator and are based on an average of each bar’s closing price over a fixed number of bars, they can be an excellent tool for allowing a price trend room to breathe and not taking a premature trade exit. In a trending market, they can offer the ability to capitalize on a trend and capture a significant portion of the move. 

Moving averages flux with price and generally stay below price in an uptrend and above price in a downtrend.

Now let’s add a little twist here, one that might be somewhat surprising to you.

If you have ever spent much time looking at stock charts, you have probably seen your fair share of stocks that go through what seems like massively long periods of time chopping around doing nothing, just head-faking every attempt to break out of a consolidation.

To the untrained eye, these “chop zones” are normal and provide little information or clues as to when the best time is to enter a trade.

But what if you had an 'overlay' on price that exposed hidden cycles showing prime trade entry zones based on common historical patterns of stocks that demonstrated similar levels of momentum and vector?

It might look something like this (TM-3 Breakout):

ACST - Acasti Pharma Inc.

Now this is a somewhat unconventional approach to price trend analysis, and it is as simple as applying bar counts to trend line placement the same way you would with moving averages.

Generally, after an extensive run-up, price will cycle through three primary cycle trend lines (CAT-Lines: CAT-1, CAT-2 & CAT-3). The price gathers strength as it cycles through these trend lines and entering too soon before CAT-3 has set can result in price being slammed back down by overhead selling pressure.

Depending on the time frame you are trading on, the cycle (bar count) may be minimal or extensive (i.e., fifteen-minute bars versus one-minute bars).

Too often, I see well-known trading gurus recommending stocks inside of CAT-1 & CAT-2 cycle lines, almost guaranteeing several additional months of chop or do-nothing price action. That can be very costly in losing trades or stagnant account growth.

Yes, of course, most traders are not aware that these cycles even exist, but seasoned traders who understand how deep price retraces can affect the length of price consolidation zones generally adapt using other technical criteria. But our cycle tools are specifically geared toward 'applying the right math, at the right price points.'

The more traders who are made aware of these cycles, the more apt that, in the long-term, 'cycle-adaptive' trend lines or 'Lemal Lines' will be commonplace among a trader’s technical toolboxes.

This is a scientific approach based on decades of reverse-engineering high performing stocks. Basically, what the research showed was that after a stock has caught our attention by making a significant move, follow-up aftershocks had a high level of predictability by applying a trend line at the correct number of bars after the original breakout pivot high was established.

As for the breed of momentum stocks, the Big Kahuna style of trading thrives on (high vector stocks-with explosive price action) the bar count is especially predictable on the monthly time frames.

Now, for those experienced traders who know that it is tough enough to get a conservative tight entry into a trade on even the daily bars, you are probably spitting up your coffee right now if you think that I mean we make trade entry decisions on a breakout of a monthly bar (which includes about 21 daily trading bars)…that is not what I’m saying.

The Monthly Bars act as a rudder to guide us into prime areas to enter the trade using daily bars.

For example, in the chart above for ACST, the key is to use the correct trend line placement based on how far and how fast the original price breakout occurred…

Let’s play the cycle pullback off of the 'U-Pivot': 

CLSK - Cleanspark, Inc.

What the U-Pivot really means from a 'Big Picture' holistic vision of price action, is that whatever news occurred to initiate the original spike, it will usually be followed by a period of gestation. For example, if a company’s sales of a particular product went through the roof and production can’t keep up with demand…the company may go through the machinations of building a new manufacturing plant, one that might not come online for another year.

Meanwhile, since the stock has already experienced massive gains for investors in a 'stage one breakout', that year of a resting phase is just what the doctor ordered as the stock begins to gather strength again in anticipation of the new 'widget factory' coming online and increasing the company’s net operating income as the sales backlog begins to get whittled down.

This isolates the original stage one breakout and will remain an important focal point for several months and sometimes even several years (depending on whether we are using monthly or yearly cycles)… This will act as a reminder of the correct timing to use for upcoming breakouts.

Based on our decades of reverse engineering high performing stocks, we draw a trend line across the highs of that original breakout, to a point in time, thereafter, based on cycles.

The correct cycle to use on the trend line placement can vary by as much as 3-8 months or more depending on how far and how fast the original breakout managed to soar.

The original breakout can be distilled down to a mathematical formula with two variations of momentum, one called BMI which stands for Breakout Momentum Indicator and the other is VR which stands for Vector which is a measurement of “Price In Time”. Whereas BMI measures how far a stock’s price moved, Vector measures the speed at which the move occurred.

The mathematical formula we derive from analyzing the original breakout provides significant clues as to which cycle to use in our stock trading toolbox.

With a little bit of training and the ability to understand sixth-grade math, you can learn the nuances of BMI (and VR or Vector) in about half an hour. Cycle-based trendline trading, done in a vacuum is a recipe for mediocrity. It is the COMBINATION of the right momentum and the RIGHT cycles located strategically in a stock's price trend which can lead to explosive quick resolution stock trades.

However, so as not to muddy the water too much and confuse you more than necessary in this short blog post, I will speak in generalities based on average setups with more focus on the actual cycles than the momentum aspects which will cover in future blogs.

There are three primary cycles we use for trading the best of the best momentum stocks in the market. TM-1, TM-2, or TM-3. (to download the Big Kahuna cycles graph: click here).

The TM-3 is the dominant cycle inside a cup and handle consolidation. If a stock’s price run-up was HUUUUGGGEEE, the correct cycle trend line length could be pushed well into the yearly cycles, but I digress.

Assuming an average price run-up in stage one of a super-cycle (basically, the left-hand side of a cup and handle pattern), the trend line drawn across the peak, the “U-Pivot,” to where the TM-3 cycle length sets (this is a 5 -7-month cycle) will often “forecast” prime trade entry zones.

This is often well in advance of the general trading community taking notice, and the added advantage of buying here is that the lower implied volatility can allow for excellent option pricing, especially on slightly or even deep out-of-the-money call options.

Quite often, due to the pent-up price tension in these areas of resolution of key TSS Cycle lines, price will explode out of these price squeezes.

Cycles can emerge not only from the highs of a consolidation but can also from the lows. When cycles converge on both sides of a price trend, they can combine to create these explosive “price squeeze” breakouts where strong accumulation meets strong support.

Consider BGNE, a trade with a HUUUGGGEEE breakout driven by one of our key TSS Cycles, the TY-1 Cycle. If you have heard me talk about this cycle before, you know it is one of our most powerful. BGNE’s price finally broke out of that cycle after languishing for 12-months, doing NOTHING! It just chopped back and forth, mostly in a sideways downtrend…

One of the strategies we use for breakouts of key primary cycle trend lines is to not only buy some stock but also invest a small portion in some distant out-of-the money options. On this trade, just $500 invested in some WOTM (Way-Out-of-The-Money) options was worth $26,000 just a few days later. This is for the options only; this does not even count the profits from the stock buy!

Another recent trade, QRVO (NDAQ: Qorvo Inc), broke out for a $20,000 gain on just $500 invested in WOTM options. The breakout was thanks to the TM-5 Cycle, another of our powerful long-term cycles. It finally broke out of that cycle after over a year of chopping up the unwary traders with head-fake after head-fake. Gann, Fibonacci or Elliot wave traders were stuck in the muck with little more than 5-10% month-over-month gains for the past 5 months using their sometimes archaic (and little picture) approach to price trend analysis.

Do these breakouts happen every day? No, they don’t. But they also do not keep you stuck in a morass of fruitless unproductive trades like many other trading systems do.

Buying at the right time inside of these cycle squeezes can create dramatic gains when the stock price explodes, for example, on an excellent earnings report.

This is how you can use small sums of money to mimic a much larger position as if you were buying the stock outright. By taking a laser-like approach to stock selection, on the right stocks primed for explosive action, as demonstrated in prior stages of their super-cycle, it is possible to trade in and out of just the best possible setups the market has to offer over and over, since there is a finite number of cream of the crop stocks in the market at any given time.

The cycles that work well for trading stocks in a cup differ significantly from those used during a significant shakeout after a “super-cycle” is complete. For stocks that have undergone extensive technical damage and are in a horrid downtrend, we use two key cycles with more extended cycle lengths to accommodate the inevitable lethargic price recovery.

These cycles are the TM-5 and TY-1, and for some reason, they work like gangbusters. It is probably something on a physics level, and whatever “force” that allows us to consistently target these stock phenoms, let’s just go with the flow. (To download the Big Kahuna cycles graph: click here).

Here is an example of the power of “stealth” entries into these types of trades and how quickly they can recover when using the correct TSS Cycle.

As shown in the chart below, PETS (PetMed Express) pretty much crashed and burned after completing its super-cycle.

However, using the TY-1 cycle, we were able to buy in at a "stealth" entry point and profitably exit

the trade after just 14 days with a gain of over $10,000.  

PETS - PetMed Express, Inc.

Each price advance during the downtrend was quickly extinguished and it didn’t get much of a reprieve until the breakout of the TY-1 cycle.

Can you imagine how painful the trading account damage would have been throughout that downtrend for someone who was buying blindly just because they liked the stock…instead of obeying the cycles? A Big Ouch!!

As shown in the option pricing below, prior to the late October mega-gap up on earnings, the stocks’ low volatility kept the option prices low. The $22.50 Call contract for November 15 expiration, was just .20 per contract on October 15th during a one day “shakeout.” Meaning for just $500 you could control 25 contracts or 2500 shares.   

Just a few weeks later the option pricing on day one of the pullback after the gap up 3-day price spike, was about 3.65 (splitting the 3.30 X 4.40 Bid-Ask).

This means that your original $500 invested was now worth $9,125.  Now those are some Big Kahuna waves!!

And this was all made possible by a simple little strategy called “applying the correct TSS cycles” based on what a stock has done after a significant price spike has occurred.  

Can you see how powerful this approach to stock trading can be? By applying the correct cycle length to an already existing attention-getting price run-up, it is possible to consistently home in on the market’s top setups.

How would you like to have taken the winnings from PETS TY-1 cycle trade ($9000) and put it into a trade like HOV, which did something similar by blasting out of its TY-1 trough from a hellacious, nearly two-year downtrend for a 300% gain. My trading partner, Daryl Thompson, spotted this trade, and as you can see, the TY-1 cycle affirmed its tremendous potential. At the time, HOV only had split adjusted options due to its prior reverse split of its shares, and they were not ideal for option trading since they were not full-lot options. Let’s calculate based on just buying the stock outright using the winnings from PETS.

HOV exploded upwards by over 250% from my trading partner’s post. $9000 invested into this trade with a 250% gain would be worth $31,500 just two months later. If the original PETS trade was bought with options, it would have been possible to turn just $500 into $31,500 rolling PET's winnings into HOV for a 6200% gain in just over two and a half months.

Now, in reality, this particular trade was in motion prior to the previous PETS trade, so it would not have been possible to piggyback these two particular trades. But, I think you get my point. By stacking back-to-back key cycle-based trades, it is possible to exponentially expand your trading account in short order starting with just a small amount of trading capital.

If you are not familiar with option trading, you can learn just the very basic level options trading, such as trading calls, by viewing a few 10-minute YouTube videos. It is not complicated. 

To summarize, this cycle-based style of trading originated over a decade-plus of reverse-engineering high performing stocks. The research showed that with just three points of analysis, you can capture stealth under-the-radar trades with explosive trading potential in as little as a few days (PETS gap was a three-day gap) to a few months or longer.

This can allow you to consistently RULE THE FREAKING MARKET’S!! Just in case I haven’t been clear enough 😉

Big Kahuna wave trading can be distilled down to a simple concept. It’s like climbing to the top of a volcano, surveying the entire island to find the biggest waves before putting your surfboard into the water. TSS Cycles will give you an edge in finding and riding the stock market’s biggest waves consistently.

Stay tuned…more waves coming!!

Paul Lemal
Big Kahuna Trading Club