The quality and resolution of the cycle measurement can be determined from the spectrum display. A simple spike in the spectrum window indicates that only a single, well-defined dominant cycle is present. If the display is a mushy bell-shaped curve, the cyclic energy is spread over a range of cycle periods. You should be less inclined to trade on the basis of cycles if the spectrum indicates this poor resolut ion of a dominant cycle. The poor resolution means that there is a low confidence that a single useful cycle exists. The spectrum also indicates the existence of several simultaneous cycles when they occur. The relat ive amplitudes and phasing of multiple cycles can make interpretations of market action more difficult. Multiple cycles can add together in a complicated way, like biorhythms, to make forecasting more problematical.
The spectrum can be used to anticipate the onset of a trend using the principle of proportionality. MESA considers a trend as a segment of a very long cycle. The principle of proportionality treasury bonds m9s2
Figure 11-2 Spectrum Display Lifts Off the Baseline Near the Beginning of a Trend treasury bonds m9s2
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Figure 11-2 Spectrum Display Lifts Off the Baseline Near the Beginning of a Trend asserts that the longer cycles have a much larger amplitude than short-term cycles. MESA displays cycle periods up to 50 days on its spectrum display. Longer cycles are out of scale, so the display only catches a piece of the skirt of the bell-shaped spectrum. With reference to Figure 11-2, when the trend begins we only see the short-term cycle in the spectrum. Figure 11-3 shows the spectrum further into the trend. In this case, we start to see the skirt of the long-term cycle (trend) as the spectrum display lifts off the baseline near the right-hand side. Progressing in time, Figure 11-3 shows the development of the trend and the impact on the spectrum display. The spectrum is still further off the baseline, showing the trend is gaining strength. Finally, Figure 11-4 shows the trend well in force and the spectrum implying there is a very strong dominant cycle with a period much longer theasuhv bunds hes(\ 3
Figure 11-3 Further Lifting of the Spectrum from the Baseline Confirms Trend Development theasuhv bunds date = op em = high ■ lou close»
Figure 11-3 Further Lifting of the Spectrum from the Baseline Confirms Trend Development treasury bonds spectrum d193z cycle
Figure 11-4 Skirt of the Trend Spectrum Swamps the Short-Term Cycle d193z
Figure 11-4 Skirt of the Trend Spectrum Swamps the Short-Term Cycle date 901112 qpeh » 32.19 high « 93.b3 lou ■ close'
treasury bonds spectrum cycle than 50 days. The trend stays in force until the price next touches the instantaneous trendline.
A good spectrum does not necessarily imply that the prediction will be good. This is because the spectrum is formed from historical data while the prediction deals with the immediate future. For example, if the market has had several high-quality cycles, the spectrum will have high resolution. As we approach the cyclic peak, the prediction correctly predicts the expected downturn. Rut if an uptrend really has started, the prediction is dead wrong. The predicted direction for the next several days continues to be a downturn while the spectrum is still looking good and the uptrend is roaring off. Finally, the inertia of the historical data is overcome, and the predicted direction snaps to follow the trend. This snap often comes too late, on the order of three days after the trend has been declared, by using the failure-to-cross-the-trendline method. It is good practice to abandon trading using cyclic strategy immediately when the price fails to touch the trendline over the last half dominant cycle.
The MESA prediction has the greatest validity when the market is in the cycle mode and the measured dominant cycle has been stable for at least a half cycle. The expectation is that, this stable dominant cycle will continue into the future. The prediction reflects this expectation, and additionally factors in the contribution of all the other measured cyclic components. The MESA
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