# The magic number 12

One of the most basic assumptions in forms of financial analysis is that price movements are controlled by underlying cycles in price and time. This means that price fluctuations in all actively traded securities are intrinsically guided by regularly recurring oscillations (which typically take the form of wavelengths) which tend to fluctuate from one extreme to another—like a pendulum—in equal distance, time and magnitude.

But cycles are more than just esoteric oscillations on a price chart. They are everywhere and surround us in our day-to-day existence; indeed, our very universe is governed by the cyclical principle. Many astute traders and financial analysts have attempted to harness the power of cycles in their attempts at profiting in the financial markets. They realize that if the essence of the cycle can be discovered, it will surely set them on the path to profit without measure. May we propose that in order to plumb the depths and mysteries of the cycle, one must discover the numerical essence behind it. And that essence is contained within a single, simple number, and one that has a tremendous significance in our everyday lives: the "magic" number 12.

To one unfamiliar with the concept of financial cycles, it is very difficult to explain with ease and clarity. Books on cycle theory tend to run over with arcane language, indecipherable technical jargon and lofty platitudes. Most cycle theorists seem either unwilling or unable to explain the basic concept of cycles to the layman in terms he can understand. But we have discovered a most remarkable aid for explaining this all-important financial concept to laymen and experts alike: the clock.

It is also the standard by which our day-to-day lives are governed. For instance, there are 12 numbers on a clock, with 24 hours (12 X 2) composing the day. Each hour is composed of 60 minutes, which is divisible by 12 (60/12 = 5). Each minute is also composed of 60 seconds, further divisible by 12, for a total of 3600 seconds. 3600 divided by 12 is equal to 300. Furthermore, 300 is also divisible by 12 (300/12 = 25). But what is most important for us to note is the number 3600, or rather, its essence of 36. As we will see, this number 36 (12 X 3) forms the basis of much of what concerns our financial markets.

As an aside, we note that 12 is more than just the basis of time; it is also the basis of measure. Imagine, if you will, holding a simple wooden ruler before your eyes. It is a straight line composed of 12 inches, with every inch divided into 16ths, for a total of 192 fractions of an inch. Notice how 12 is the predominant number on this ruler; and further, how every component of the ruler is divisible by 12. The number twelve can be divided into itself one time. The number 192 can be divided by 12 a total of 16 times. The number 192 is itself equal to twelve when we add each separate digit together (1 + 9 + 2 = 12). Moreover, there are 12 months in a year, and four seasons within a year (which, of course, can be evenly divided into 12). There are also 360 degrees in a circle (360/12 = 30). As you can see, then, twelve is the basis of our system of measurement.

Furthermore, 12 has a deep significance in the spiritual realm. For instance, during his earthly ministry, Jesus Christ surrounded himself with 12 disciples. We are told in Scripture that before his throne in heaven are 24 elders (12 X 2). Bible scholars and theologians have long recognized that the number 144 has an especially profound meaning in Scripture, and is used in some places to represent eternity. Interestingly, the number 144 is equal to 12 times 12. This mysterious number 144 is also has a profound importance in the realms of mathematics, physics and astronomy.

Hopefully, we have impressed done a fair job of impressing upon you the great importance of the number 12. Quite simply, it must be considered to be the basis of our very existence. But for our immediate purpose, it constitutes the basis of the financial cycle that we are examining.

Let us assume that the well-known 60-year Kondratief Wave cycle is the most important cycle in the average person's lifetime. After all, it is the cycle that will most profoundly be felt during the life-span of the average individual, and at least one complete K-Wave cycle will always be witnessed per generation. There are, of course, much larger cycles than the 60-year K-Wave, but for our purposes we may ignore them since their impacts are in most instances less conspicuous than that of the K-Wave.

Notice first, an average 60-year K-Wave is divisible by 12, which equals 5. Each leg of the K-wave can also be broken into thirds. The ascending, or inflationary, leg of the K-Wave is subdivided into three components: early inflation, runaway inflation, and late runaway inflation. Similarly, the descending, or deflationary, component of the K-wave is also divided into thirds: early deflation, runaway deflation, and late runaway deflation.

Furthermore, every 60-year K-Wave can be divided into three 20-year components or four 15-year components. These 3-4 year components are known as Kitchin cycles (named after the man who discovered them). Most of us know this cycle which comes down every 3-4 years by its more common name of "the business cycle," or "the presidential cycle." What is more, even this 3-4 year Kitchin cycle can be broken down into 1-year "Kitchin thirds." The Kitchin cycle can also be broken down further into what is what is known as the 20-week Wall cycle (named after its discoverer, P.Q. Wall). The Wall cycle (which completes every 3-4 months) is the cycle which has the most apparent effect on the stock market, and is most responsible for the deep fluctuations on the charts of the major averages. There are a total of 9 Wall Cycles for every 3-4 year Kitchin cycle. (Notice how almost every cycle—besides being divisible by 12—can be broken down into thirds and fourths. This composes a major plank of cycle theory, known as the doctrine of "threeness and fourness"). Thus, the secret to being able to "time" the stock market is to discover where it is in relation to the Wall cycle, and further, where it stands relative to the Kitchin cycle.

The analyst can always tell when the 3-4 year Kitchin cycle (i.e., business cycle) has bottomed by observing the stock market. A falling Kitchin cycle always produces a sharp, steep sell-off in the market. The Kitchin cycle has bottomed when an equally sharp, high-volume reversal sets in, carrying stock prices higher. The last Kitchin cycle bottomed in October 1997 based on this criteria.

Furthermore, every 3-4 year Kitchin will always subdivide equally into its 9-component, 3-4 month Wall cycle. These Wall cycles are also observable on a stock market chart (particularly the Dow Jones Industrial Average).

Since the last Kitchin cycle bottom in 1997, there have been eight completed Wall cycles. Based on the behavior of the market in recent days, the final Wall cycle number 9 has begun. It should top out roughly in late July or August—September at the latest—and its descending phase will coincide with the falling of the business cycle itself. This is what will act as the catalyst to the major Wall Street crash this fall we have been predicting for some time. And since this projected crash will occur in the final third of the deflationary leg of the present K-wave (late runaway deflation), it should be compounded in breadth and magnitude since we are entering a particularly deflationary economic environment based on our position in the larger cycle.

We have focused primarily on cycles which impact the stock market. These cycles affect the commodities markets too, though in different ways. The commodity markets have their own unique cycles which influence and guide prices, cycles that we will not touch on here. Suffice it to say that one of the more important commodity cycles is known as the Juglar cycle, which has an average length of—you guessed it—12 years. It is this cycle, more than others, which governs the price of that all-important commodity gold. Based on our reading of the Juglar cycle, gold should perform quite well during the initial stages of late runaway deflation (deflationary pressures notwithstanding), and should produce our projected price of $450/oz. gold within 2-3 years.

There is much to be gained by a study of cycles, and we sincerely hope our endeavor at explaining the interconnectivity of cycles in reference to the number 12 will stimulate you to further study. While there are many aspects of the cycle we could address, we have in this essay focused on what we consider the foundation of all cycles: the number 12.

Clif Droke is editor of the weekly Leading Indicators newsletter, covering the U.S. equities market outlook from a technical perspective as well as the general economic outlook. He is the author of the recently published book, Technical Analysis Simplified. For a free sample issue of Leading Indicators, send name and mailing address to [email protected] or mail to: Leading Indicators, 816 Easely St., #411, Silver Spring, MD 20910.

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