First some basic information about interpreting the cycles:
- cycle movements are like waves in nature. The stronger the wave, the more dissipation is needed to release the built-up energy
- there are two types of waves: "Cyclic" and "Impulse"
- a magenta line is indicating the peak of a cyclic wave, otherwise said, a resistance level
- a cyan line is indicating the bottom of a cyclic wave, or a support level
- a cyclic wave generates a bottom at a cyan line and correspondingly, a top at a magenta line
- the green line (which turns red in downtrends) is the MCM Moving Average
- a cycle impulse is confirmed once the price AND the MCM MA move either above a magenta line for an uptrend or below a cyan line in a downtrend.
The current trajectory of the weekly cycle chart on ES is a perfect example of how powerful a cycle impulse can be and what is the typical behavior.
At point “A” the price moved above the resistance (magenta line) indicating a possible cycle impulse up in the making. At point “B” the MCM MA moved above the resistance (magenta line), confirming the cycle impulse. Once a cycle impulse is confirmed, it usually back-tests before really taking off. This happened almost perfectly at point C, when price came quite close to the magenta line and previous break-out. After that it was clear sailing, with no signals generated to indicate a turn or potential change of the main trend. At point “D” a Bullish Retrace (BR) was triggered, which normally needs an END to finish. The BR and subsequent END higher indicate that the cycle impulse might be coming to an end. Typically an END is enough on longer time frames, but it is common for also 2nd END and 3rd END to trigger. In our case the BR triggered at point “D” had an END, then another BR triggered and 2nd END and at point “E” we had the 3rd END. At that point, the cycle impulse was finished. The price went lower, a cyan support level was generated and broken, turning into a cycle impulse downward at point “F”.
The Dow cycle chart is a bit different, although it moves very much in sync with ES. Dow was already in a cycle impulse upward and had a 3rd END generate at point “G”, which coincides with the timing of point “A” on ES. The price broke above, the MCM MA also, and that became a nested impulse up. Dow had an earlier BR and 1st END (at point “H”). After that it also had a 2nd END and 3rd END, which signaled the end of the cycle impulse. After that it generated a cyan line and a corresponding magenta line, which signifies a regular “wave”. Another cyan line was generated, which was then broken by both price and MCM MA at point “I” signaling a cycle impulse downward.