Cycle indicators that traders can use to predict stock movement

Markets move in cycles and this is what drives the markets to various probabilities and possibilities. To ascertain the current market scenario and shift in sentiments, one needs to first be familiar with various means to determine the cyclical trend. The various phases of the markets depend on economic development, seasonality, some unpredictable events and Indian elections, among others things.  A few of these factors repeat often which enables market participants to anticipate the next move and thus spot a trading opportunity.

Although, cyclical trend isn't the most reliable for short-term trading, long-term investors put great faith in it. Investors need to formulate a strategy which accommodates profit booking as well as opportunities provided by cyclical phases. On a bigger scale, a clear outlay of cyclical phases may help secure profits that outrun the returns of other indicators.

The two major cyclical indicators that assists in identifying the shift in cyclical trend are: Commodity Channel Index (CCI) and Detrended Price Oscillator (DPO).

Commodity Channel Index (CCI)

As the name suggests, this indicator was developed to determine the change in cyclical trend in commodities. However, as the indicator has evolved over time, the same can be applied to equity, forex, futures, and other assets. This indicator works especially well in assets related to auto, consumer, manufacturing, agriculture and fertilizers.

CCI is calculated based on the 1/3rd value of the cycle, considering the low to low or high to high value. To make it more viable, a simple moving average and mean deviation is also considered.

CCI is plotted beyond +100 and -100 scale. Whenever the CCI scales above the 100 value, the trend is set to enter a strong bullish phase with price expected to witness strong buying momentum. Similarly, when CCI drops below -100 value, the stock is said to have attained a negative phase with bears gaining hold of the trend. Herein, the support/ resistance is considered as the zero line.CLICK HERE FOR THE CHART

Detrended Price Oscillator (DPO)

This is a lagging oscillator developed to eliminate the factors that strongly influence price, and trigger uncertainty and volatility. It removes the trend and tries to understand the overall structure of the markets and predict the cycle. The DPO is calculated by comparing the past prices of the stock to a displaced simple moving average (SMA). It is plotted on a zero line scale, wherein the price moves above and below the zero line, assisting in determining the cycle length as well as overbought and oversold conditions.

It helps to understand the highest price and lowest low to determine the stock cycle. This also identifies the time frame between the biggest and lowest price swings. When the DPO is above the zero line, the price is said to be in a bullish cycle and vice versa. This oscillator is used as an indicator of the overall picture, and the trading signals themselves may not appear clearly without the assistance of other indicators. CLICK HERE FOR THE CHART