Multi timeframe Cyclical Analysis: Identify Stock Market Phases and Uncover Lucrative Trading Opportunities!

MonkeyMakesMoney
8 min readApr 10, 2023

The Elliott Wave Theory proposes that market prices move in a series of five waves in the direction of the main trend, followed by three corrective waves against it. This repeating pattern can be found on any timeframe of price charts of stocks, bonds, futures, or cryptocurrencies. Each wave or phase of a rally has specific characteristics that can be identified with technical indicators and oscillators. In this article, we’ll explore how to use readings of oscillators applied to different timeframes to correctly identify the current phase of a rally and find attractive trading setups.

Read part 1: Cycle Analysis of the Stock Prices Was Never That Simple

Read part 2: Why It’s Difficult to Nail the Exact Top of a Rally. But It’s Still Doable.

A simple math formula that summarizes three sinewaves of different wavelength can be used to build a realistic model of a five-wave market rally followed by a three-wave corrective pullback. That pattern is familiar for anyone who studied the Elliott Wave theory.

Cycle Model of a typical five wave up rally followed by a three wave pullback

On the chart above you can see a normal path of a stock price (black line) rally from a bottom to a top. Quite often we can easily recognize three moves or waves up with two pullbacks in between. Let’s quickly review three main phases of any rally.

Bullish thrust — the initial move up off a low. That initial move up is normally led by day traders who buy only to sell several hours later. Almost nobody believes the price made a lasting bottom and this move up is a starting point of a new big rally. At this point swing trades do not participate in that initial move up off the last low because they wait for confirmation of a bullish reversal.

The second phase is the “Bullish acceleration”, where fund managers and swing traders come into play, driving the price even higher. They focus on Daily and weekly chart and therefore they do not care how overbought price may look like on intraday charts. This phase is often the strongest move up and can be challenging for day traders who aren’t expecting such a big move. Day traders do not expect a big move and start shorting this move because price triggers myriads of overbought signals on 5 min, 15 min, 30 min and even 60 min charts.

The third and final phase is the “Distribution/divergent top”, where almost everyone in the market believes that the price is about to skyrocket. However, this is often the point where the rally is actually about to come to an end. Traders who initially doubted the rally during the first two phases now fear missing out on potential profits and go long when price starts making new higher highs. Short sellers who entered the market too early during the previous phase now have to close shorts because they scared the rally will keep going higher multiplying their losses.

In this article I will share ideas how to build an efficient tool to identify market phases and take advantage of them. In this article, we will explore the specific patterns formed by long-term, midterm, and short-term cycles that drive every move in the stock market.

To accomplish this, we will be using my proprietary multi-timeframe indicator for TradingView. This indicator is designed to help traders identify market phases and pinpoint the optimal entry and exit points for their trades.

Our analysis will focus on the location of different cycles and how they interact with each other to form patterns that confirm completion of one phase of a market rally and start of another phase. By understanding these patterns, traders can efficiently predict direction and amplitude of the next big market move and take advantage of a prevailing cycle.

Ultimately, our goal is to help traders build a solid foundation in technical analysis and provide them with the tools they need to succeed in today’s fast-paced trading environment. Whether you are a seasoned trader or just starting out, this article will provide you with valuable insights and practical tips for mastering the art of cycle analysis.

To demonstrate the effectiveness of our proprietary multi-timeframe cycle indicator for TradingView, let’s take a closer look at the 10-minute chart of the S&P and how our indicator can be used to identify market phases.

As you can see in the chart below, our MTF Cycle Trader Oscillator has identified the underlying cycles and their current phases. Specifically, we can see that the strong move up in the S&P in January 2023 was driven by a bullish weekly cycle that bottomed at the end of December 2022 and topped at the beginning of February 2023.

S&P 10 min chart

What’s particularly interesting to note is that the bullish thrust phase, which is the initial move up off a low, typically starts when the long-term weekly cycle is deep oversold and sitting under the green oversold area. In this case, the first red flag for bears who expected a continuation of a move down in late December was that the midterm daily cycle could not go to the lows where the longer-term weekly cycle built a flat base.

The first confirmation that the price has started the bullish thrust phase is when the midterm daily cycle hits the red overbought zone. This indicates that the shorter-term cycle is gaining momentum and pushing the price higher pulling up the long term cycle gets out of the oversold area.

S&P 10 min chart

However, the second and arguably more important confirmation that the price has made an important low and started the bullish thrust phase is when the long-term weekly cycle crosses over the zero line. This indicates that the longer-term cycle is also gaining momentum and adding to the bullish pressure in the market.

Correct identifying the initial Bullish thrust phase of a market rally is crucial for traders who want to avoid mistake shorting ahead of the strongest move up of the Acceleration phase. In the case of the 30 min GDX chart below, we need to meet both criteria to distinguish a flat bullish Accumulation phase from the Bullish thrust phase:

The first move up off an important low pushed the midterm cycle into the red overbought zone, indicating that the shorter-term cycle was gaining momentum. However, the move was not strong enough to pull up the long-term cycle. During the first week of March 2023, the long-term weekly cycle was still sitting in a deep oversold zone ignoring that move up. Note that the first move up was completely erased by March 10.

It wasn’t until the next push higher, which made a temporary top on March 20, 2023, that both criteria of the Bullish thrust phase were met. The daily cycle reached the overbought again, indicating that the shorter-term cycle was gaining even more momentum, and the long-term weekly cycle crossed over the zero line, indicating that the longer-term cycle was also contributing to the bullish pressure.

We can apply the same rules to distinguish the Accumulation phase from the Bullish thrust phase on the chart of SPY showing the period from July to August 2022:

SPY, 10 min chart, July — August 2022

In the course of the Accumulation phase the Daily cycle gets overbought, tops out and then rolls over while the longer-term weekly cycle keeps crawling higher still lacking power to climb over the zero line.

There are two main implications of technical analysis based on recognizing market phases.

First, the completion of the Accumulation phase is often followed by a deep pullback, where prices may retrace a substantial part of the progress achieved during the preceding rally. This can be a last chance for short sellers to cover their shorts before the market resumes its uptrend.

Second, the completion of the pullback that follows the Accumulation phase can serve as a wake-up call for traders who were bearishly inclined. They may need to consider switching from a mean reversion strategy to a trend-following strategy in anticipation of the next phase of the rally.

Upon completion of a deep pullback that follows an accumulation phase, it’s important to watch for the daily cycle to cross back over the zero line. This can be considered an early confirmation of the start of a Bullish Thrust phase.

This was a solid confirmation that a new rally had started, and traders who were paying attention to these indicators were better positioned to take advantage of the next stronger move up. By keeping an eye on both the shorter-term and longer-term cycles, traders can identify key inflection points and make more informed trading decisions.

In my next article I will explain how you can pinpoint a potential top of a rally in the Acceleration phase.

Read more about the MTF Cycle Trader Indicator here.

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Important Disclaimer

Neither the author nor the publisher of this article is registered as an investment adviser nor a broker/dealer with either the U. S. Securities & Exchange Commission or any state securities regulatory authority. Readers of this article are advised that all information presented here is solely for informational purposes, is not intended to be used as a personalized investment recommendation, and is not attuned to any specific portfolio or to any user’s particular investment needs or objectives.

Trading stocks, options, or futures carries a high level of risk, and may not be suitable for all investors. Before deciding to trade, you should carefully consider your objectives, financial situation, needs and level of experience. The author provides general overview of trading methods that does not take into account your objectives, financial situation or needs. The content of this article must not be construed as personal advice.

Past results are not indicative of future profits.

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MonkeyMakesMoney

Monkey Trader uses Premium TradingView indicators to get an edge over millions of other traders