A tendency is something likely to happen, although it is not certain that it will happen. Cyclical tendencies are phenomena that are likely to happen regularly, even though there is no guarantee.
It’s a sunny, beautiful day. Eric and John meet on their way to work.
Implication vs. Tendency
Let's distinguish between two terms: implication and tendency. The difference is subtle, but important. If something tends to happen, it doesn't necessarily mean that it has to happen. For instance, if you like strawberries more than any other fruit, then you most likely tend to buy them more often than other fruit. However, that doesn't mean that you will never buy anything other than strawberries. The same happens in the capital markets because nothing is certain (no implications) therefore, we can only predict (on the basis of tendencies), what is likely to happen.
Theoretically speaking, a tendency of some indicator is a movement in a specific period of time. Analysis of cyclical tendencies complements Technical Analysis because its focus is time, whereas Technical Analysis is concerned primarily with price. The idea behind Cyclical Analysis is that markets have internal rhythms, and if you are able to identify those cycle periods with a reasonable amount of accuracy, you can then forecast when and where tops, bottoms, support and resistance are likely to develop.
Types of Tendencies
There are three different kinds of such movements. The first is called a growing tendency and it appears when the values of an indicator regularly increase (think: bull market). The second is called a decline tendency and occurs when the values consistently decrease (think: bear market). The last is a horizontal tendency (think: consolidation) and appears when the value does not fall or rise in a significant way (e.g. the GDP of the US has been constant for the last year and stands at 3.4%).
It is worth emphasizing that especially in capital markets a tendency may repeat at certain times. This is called a cyclical tendency and it happens when similar trends occur periodically. Cyclical tendencies are most observable when you look at the historical data of some index. The best way to understand the theory is from real life. A simple example of a cyclical tendency is the growth in consumer spending right before Christmas. Every year at this time Americans tend to spend large sums of money, significantly more than in the middle of the year. This happens year after year; therefore we talk about a growing tendency in expenditures, which repeats every year. In other words we have a cyclical tendency.
We can distinguish two situations in the capital markets. The first appears when theoretical tops/bottoms (defined as cycles) exactly coincide with real tops/bottoms. This situation is well known by analysts and investors but, unfortunately, is rarely observed. However, it doesn’t mean that analysts can’t use this knowledge. Moreover, in technical analysis it is not necessary to have actual tops/bottoms line up perfectly with the ideal when researching cyclical tendencies. The second situation appears more often, and as you can imagine, adjusting the theoretical tops/bottoms to real ones isn't ideal, but we are still able to use that information in analysis.
Cyclical Tendencies in Gold - Example
To clarify things further, here is an example: Gold tends to top every 2.5 months +/- 10 days. Since we had to include this +/- 10 days to make the sentence true and complete, we know it is not a strict rule, but a tendency which is likely to happen.
To sum up, cyclical tendencies are movements in the value of some indicators that repeat periodically. We are able to predict cyclical tendency. Of course, in the capital markets nothing is certain so we can only predict what is likely to happen (no implications). When analyzing cycles or economic trends it is recommended that you useor methods to validate your analysis and to make sure that your prediction is correct.
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