Solar-Lunar three cycles model

How the Lunar cycle affects the stock market? Many times I did this research for different financial instruments. And many times doing it, I had always a feeling that some important piece of information was missing. It was before applying walk forward analysis for this problem. With new back testing module (based on the ideas of walk forward analysis), the whole picture becomes clearer. 

Let me show you what information can be revealed in this new back testing module. 

Below you can see the results of application the walk forward analysis for Dow Jones Industrial index since the year 1950 till 2011:

What does it tell us? The line means that the best result is provided by the Moon cycle calculated using ALL available price history. In its turn, it means that this cycle is PERSISTENT, i.e. it works now, in 2011, in the same manner as it has worked in 1950s. It looks like this cycle represents some stable emotional patterns of the humankind. According to many sources  (not astrological only), the Moon is tied with human emotions. So, we may assume that this persistent cycle represents these Lunar emotional patterns of the stock market behavior.

This is how these patterns look:

For the Moon's Zodiacal position:

The price tends to go down while the Moon moves through Aries to Cancer; it tends to go up when the Moon goes from Cancer to the middle of Libra; down again with the Moon in the middle of Libra to Aquarius, and up for the Moon going through Aquarius to Aries.

This is the Moon phase cycle:

The price is higher around the New Moon and lower around the Full Moon.

Though it may sound fascinating for some readers, it is only one half of the Truth. The formal analysis reveals another strong cycle; this line tells me about it:    It means that there is another kind of the cycle. This cycle works within a restricted period of time only, i.e. this cycle works differently in 2011 compared to how it has worked in 2010. This is a dynamic cycle, it is changing constantly. The structuring period of this cycle is about one year.

I guess that this dynamic cycle represents human emotions as well, though these are temporary emotions. These emotional patterns change, and the walk forward analysis shows how fast these patterns change.

I can compare the difference between these two types of emotional patterns to the typical behavior of two generations, parents and their children. Definitely, they have different reactions defined by the generation (temporary patterns) while they have similarity as well (persistent patterns)

What use is in it for a trader? Analyzing some financial instrument or modeling some market, try to display together both Moon cycles and the Annual cycle. It is important to include the Annual cycle. Look at this example:

Here the red curve shows the fast Lunar cycle (it represents temporary emotional patterns); the blue curve is the persistent Lunar cycle that represents typical emotional patterns, and the gray curve is the Annual cycle:

Here, as you see, in the beginning of September we have a pattern confirmed by two Moon's cycles and the Annual cycle. Also, in October all three cycles indicate a presence of a turning point.

Thus, you can create a model based on these three cycles model and apply it to any financial instrument. You need to have four years daily price history at least, unpack this file into c:\TimingSolution\Work\ directory and follow these steps:

choose model:

July 26, 2011

Toronto, Canada