T2W Trading Community

Recently I sent out to my free newsletter subscribers a lesson I had written a couple years ago dealing with what I call the PAUSE formation. The reason for this was that a market that I had been sharing future cycle turn dates on had formed the early warning sign for a PAUSE formation and may present an opportunity for a trade. At the very least, it should help those looking to learn more about cycle turns, swings, pivots and other associated phenomena to cycles. The more you understand a tool or indicator the better you can exploit it.

The PAUSE formation is very simple to identify. But what I want to discuss first is what to look for in order to determine a POTENTIAL PAUSE formation. Unless you have some advanced warning, who cares what the formation is after-the-fact?

Let's start from the basics. In dealing with market cycles, it has to be understood that market patterns are the result of the cumulative effect of several cycles. But to make it really simple, let's just call each time frame a single cycle that has its own frequency and magnitude. Yes, this is extremely simplified, but should help those new to cycles altogether.

If you look on a MONTHLY price chart, that being a price chart where each price bar represents a complete month of trading, you are looking at a LONG-TERM view of the market in question. We'll call the market GOLD.

If we look at the MONTHLY chart of GOLD, you can see that prices have just been moving higher each month. So you could say the LONG-TERM cycle is moving up right now. Simple to view, right?

If we look at the WEEKLY chart of GOLD, where each price bar represents a complete week of trading, we can see that each week is making new highs. So let's say the INTERMEDIATE-TERM cycle is moving up also.

On the DAILY chart, where each price bar represents a single day of trading, we can see that price has been pulling back (down) from the recent top high on 1/20/06. A very small pullback, mind you, but the direction is still down. So we could say that the SHORT-TERM cycle is going through a down swing.

Can you visualize this? It really helps if you can.

Now consider that the LONG-TERM cycle has more power than the INTERMEDIATE-TERM cycle. And the INTERMEDIATE-TERM cycle has more power than the SHORT-TERM cycle. And all of these are working and doing their thing at the SAME TIME.

If the LONG-TERM cycle happens to be moving up, and the INTERMEDIATE-TERM cycle is moving up, what chance do you think the SHORT-TERM cycle is going to have when it wants to start down again? Quick answer: Just take a look at your daily chart of Gold and look at the 12/29/05, 1/5/06, 1/18/06 price bars. Each of these made a new daily low and then were quickly overruled by the stronger upward moving cycles. Now we see 1/24/06 making a lower low than 1/23/06. What are the odds it can continue in this direction for several days? It has longer-term cycles working against it.

Now cycles are more complex than this. But hopefully you can get an idea as to what I'm trying to get across. Cycles can support or oppose each other. If you can visualize the monthly chart making new highs, but currently the weekly chart is making a new lower weekly price bar low, what you have is an intermediate-term cycle in its downward swing (cycles swing up and then down and start over again) while the longer-term cycle is still in its up swing. You have opposing powers that will tend to cancel each other out at various points in time. And riding on these is the short-term cycle that as far as the longer-term cycles are concern is just noise. Yet, when the larger cycles are canceling each other out, the 'noise' or short-term cycle will become more visible and you will see nice swings as the market is moving more sideways on the lower time-frame charts.