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This is from the technical analysis book I am reading, please help understanding this chart. I cant get how they created this chart and cant understand it.

Quote from the book for the chart

Figure shows the profile of the 3.5-year cycle in the Dow Jones Industrial Average. The cycle is tracked in terms of six-month percentage rates of change in closing prices. Each beat of the cycle inevitably varies in terms of time elapse from the average, so the shorter cycles have been mathematically stretched to match the time elapse of the longest cycle in the matrix. Then, 18 beats of the cycle – starting in November 1946 and ending in February 2009 – have been averaged together and compared with an ideal cycle.

graph

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  • I may be missing something, but neither the graph (with the second, apparently unused, vertical scale) nor the description (with cycle lengths massaged to fit the theory) makes a lot of sense to me.
    – keshlam
    Feb 20 at 17:39

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The basis of your indicator is the Zig Zag indicator where one selects a minimum percentage or point amount of price movement in the security. Only greater price changes are displayed, eliminating smaller price changes.

The Zig Zag indicator is 100% effective in hindsight but predicts nothing since one cannot know in advance if a move will match the indicator's screening criterion. The peaks and troughs of the indicator will match those of the security. It is useful for determining support and resistance but there are easier ways to depict that.

Note that the peaks and troughs in your graph do not correlate. This is because of the unexplained smoothing referenced in the explanation of the graph.

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