Stop for a moment and imagine the following (or, better yet, relive the following scenario, since it is such a common occurrence):

A large company has just released strong earnings, better than investors or the company themselves could have dreamed about, and the stock immediately drops on the news – double digits! What's the explanation? The news reports say that it must be a combination of profit taking and fear that the company couldn't possibly continue this improbable climb.

Think for a moment if the opposite had happened. What if the company stock price had skyrocketed instead? The news reports would certainly say that the unexpected strong earnings brought many new investors who were looking to participate in the continued success of the company.

These dramatically different possibilities – and we have seen both countless times – highlight the simple fact that what truly drives the market is NOT the news, but, rather, how investors react to the news.

While it may seem that the fortunes of individual stocks rise and fall on earnings, we all know it can go both ways. Journalists are forced to come up with reasons in hindsight. However, there is a tool that really does help to explain these intuitively unusual market outcomes from news reports – cycles.

What are cycles?

It may come as a surprise that the term "cycle" comes from the Greek word meaning circle. We all know about the cycles of the seasons – such as fall to winter. We have sort of heard of inventory cycles and other economic based cycles. However, the true science of the calculation of cycles is quite scientific. Let's look at how they are calculated. Cycles are found by looking for and analyzing a series of equidistant top to tops, found in any particular data series, such as stocks, bonds, commodities, currencies, and economic indicators. Assume for example that the price of a particular stock (i.e., Apple) topped every five weeks, every eleven weeks, every 18 weeks. When superimposed together as sine curves it appears like a series of overlapping Electrocardiograms (EKGs).

The cycles can then provide tremendous predictive power from the past periodicity in order to predict the future direction- not level – of the stock price or price of any asset class in question. Finding price targets and levels requires a second type of analysis which uses a complex algorithm.

LOOKING AROUND CORNERS – THE BIG STORIES FOR 2013

Cycles predicted the recent Apple top and the Gold decline in 2012. They predicted the decline in Nat Gas from 6 to under 2. They predicted many other moves in currencies and bonds as well. Going forward, cycles show that Gold and Crude Oil will rise in 2013. Cycles predict that interest rates will rise over the next 30 years. Because cycles help to see around the corner by looking back at what, when and how investors acted in the past, "cycles" can be an important tool to help determine market direction.

CHARLES NENNER is the founder and CEO of Charles Nenner Research