Saturday, July 2, 2016

New Insights in Commodities | Cyclic Vibrations

Ahmed Farghaly (Jul 1, 2016) - The first chart is a synthetic chart of commodities. The way it was constructed was by isolating the second 18 year cycle of three 54 year cycle. The reason why I extracted the second 18 year cycle is because this is the cycle we are in right now in terms of commodities hence it should be correlated more with its counterpart in past 54 year cycles. I have also altered the length of the cycles to match the current average length of the 18 year cycle which is approximately 14.4 years. I then combined those cycles together in order to get a continuous series so I can isolate the cycle via spectral analysis and run neural network models on this particular position of the Kondratieff wave. The indicator that you see above is a neural network model with an 14.4 year cycle used as an input and the detrended zigzag as the output. This indicator's turning point should mimic those in the future provided that no significant changes occur to the length of the nominal 18 year wave. The second chart depicts the dates more clearly.

It is worth mentioning that the 14.4 year cycle with 4 harmonics was used as the input rather than just one harmonic, the reason for this was to aid us in depicted the peaks and troughs of the cycles smaller than the 14.4 year wave. As is visible on the chart above, we seem to have a clear path in the CRB index until late 2017. The projection also suggests that 2018 is likely to be a bad year for commodities. This correction should then be followed by a move into 4th quarter of 2020 followed by a correction to 2022 and so on (third chart).

In the neural network model below the price chart is an up percentage move indicator (fourth chart). It is calculated by having the cycle as an input and measuring the position of moves of over 7% a month and projecting something similar for the future of the current cycle. The likelihood of large percentage months on a closing basis is greatest from here going into mid 2019. Hence capital is best allocated in the commodity market now rather than chase the move after most of the large percentage gains have already been realized (fourth chart).

This indicator (fourth chart) is a forecast of the volatility index indicator using the same input as the charts above. It seems evident that the likelihood of high volatility is greatest from now going into 2020. This would mean that the purchase of call options are likely to be a better play than their sale in the upcoming environment. Trading in expectation of low volatility will probabalisticly lead to a loss going into 2020.