Shorting The Dow a story mostly in pictures

June 29, 2003

The above yellow chart is the DOW JONES INDUSTRIAL AVERAGE (DJIA) stock market index, corrected for inflation, plotted on a logarithmic scale encompassing 3 orders of magnitude. Logarithmic scales represent markets better than linear ones, as I have argued in other articles. This is particularly true over long time-scales. The actual price values are not important for the purposes of this article.

The vertical lines represent 8 year intervals.

The red snake or envelope shows the spread between successive major points of inflection in the medium term yellow chart.

Note how the constricted envelope portends violent moves up or down

The coloured balls (or planets?) are strategically placed to look good, and to add an air of hyper-dimensionality and intriguing mystery to this article. They also flag up areas where the angular momentum of the envelope or snake is changing. The smaller the ball the faster the rate of change.

? Mysteriously, the coloured balls seem to occur in matched pairs....

Apart from blue arrows, all the above annotations refer to historic events well-known to the investment community.

The blue arrows point to a particular pattern of fine structure found in the DOW. This appears as a series of double wave formations, with a period between the peaks of around a year or less. The pattern is almost certainly an overtone created by the summation of other longer waves. I have not yet worked out what is causing this wave structure, but it does seem to predominate where the market gets disturbed by exonomic events. Counting the number of blue events >1 from the left band and mapping those versus history we get

*ERRATA - One of my blue arrows seems to got lost in the translation from Word 2000 to Front page! And I also may have missed one out in my count. Hence I put Band 1 at 2/3 formations, not one as annotated. Band 12 - The top at 2000 is really quite congested, and on the analysis of this area (3 peaks so far) I would put quite a large E.S.D. (error).

Looking at the yellow structure within the envelope or snake we can see a periodic oscillation. This turns out to be approximately 4 years, the period between presidential elections. The cycle is illustrated more clearly by the upper white wave.

During periods of relative market calm this wave becomes regular and well defined. However, during periods of high angular momentum the waves become time-compressed. Conversely, when rising or falling in a long-term trend the waves become stretched. This compression/rarefaction effect noted for the DOW needs to be studied with respect to several other markets before it can be confirmed as having any statistical significance as a TA indicator.

Around 1929-1933 this 4-year wave is completely disrupted.

The long-term sine wave tentatively suggested in the above chart did not IMHO account at all for the feature 1927-1939. Therefore I looked for another wave function that might explain better such a sudden and shocking movement. The hyperbola is an asymptotic curve with a discontinuity. Its formula in its most basic is

y = 1/x or y = -1/x.
The formula may be 'souped up' by adding power terms.
Y(n) = (+ /-) 1/x(n)

x and y are the variables, n is the exponent. Raising the value of n has the effect of dramatically sharpening the 'corners' of the hyperbola. The blue curve drawn below was not calculated mathematically, but graphically, using a curve drawing tool with the minimum of inflection points.

I found that a hyperbolic curve naturally fell into the shape of the 1929-1933 discontinuity. A possible explanation for this is as follows.

As the market gets pulled away from equilibrium into 1928, it becomes unstable. It has too much potential energy, like a guitar string that has been stretched, or a Van der Graf generator that has been fully charged with static electricity. Something has to give, and the market eventually shorts out to the rising (negative y, positive x) phase of the hyperbolic curve. This is clearly seen, almost like a lightning bolt, around 1930/31.

The resultant impact in the market can be likened to releasing the guitar string, or banging a drum - it 'vibrates' at a signature set of frequencies and modes, and follows an exponential decay over time. Eventually it disappears into the noise of the market, and the 4 year cycle re-asserts itself.

It may be that a similar hyperbolic event is unfolding now. If so, the market must be influenced not by a single hyperbolic function, but a series of hyperbolic functions.

y(n) = K-1/x(n)
y'(n) = 2K-1/x(n)
y"(n) = 3K-1/x(n)
........Where K is the Kondratief wavelength

Have you ever seen a guitar string vibrating? The movement is sinusoidal. If you lightly touch the string above the 12th fret you can generate a harmonic that is one octave above the fundamental. The string still vibrates, but right where you touched it IT IS STILL. This is called a NODE - a point of stillness in a field of energy. The eye of the storm, if you like. I had this image in mind when I did the final drawings in this set. This figure has the curves drawn in by eye…

The next figure shows precise orthogonally-oriented mathematical functions - hyperbolae and sinusoidal.

Here each hyperbola has its own associated sinusoidal function. It looks as though after the present K wave we are about to enter a new trading channel with a higher baseline (green), previously resistance to the present cycle. As we move forward, and the stock market spends more time higher, it seems to 'sense' the upper channel at around 1990. In 1995 it penetrates overhead resistance which now becomes support. This support will be penetrated violently once more, when the pull of the negative phase green hyperbolic catches the wave - the 'SHORTING of the market referred to in the title (I bet you spotted the double entendre by now?) It looks as though this process may already have started, and that is what Alan Greenspan, whose age correlates to the K-wave, is trying desperately to forestall.

Secular conclusions

1) I predict we are in for some extreme market volatility in which we will have trouble, strife and poverty such as we have never had in our lifetimes. (Many commentators expect this also, having arrived at similar conclusions by examining data from many diverse sources.)

2) The DOW wave envelope may be an interaction between sinusoidal hyperbolic functions. This may apply to stock markets in general.

3) The sustained sinusoidal component has a wavelength which corresponds to K and an envelope that corresponds to the the first harmonic of K.

Spiritual conclusions

1) The discontinuous hyperbolic represents birth and death, being of duration the lifespan of a human, K. It comes from and goes to infinity, the unknown.

2) The sine wave with a period K represents eternity, constancy and harmony.

3) The 2 waves are a metaphor for the Yin and Yang of human experience - the conflicts of interest that combine to produce the timbre of life. In terms a sound engineer would understand, the sine waves are the melody, the hyperbolae the beat, and the DOW the music.

Note - This study needs to be investigated further. With reliable inflation-adjusted stock index data for longer time periods this hypothesis could be further tested to see if the match over the last 90 years or so is purely a matter of chance.

G.T. (Good Trading)
DISCLAIMER
If I was absolutely 100% sure about the future price direction of any market, stock or commodity, I would be retired, like most other pundits! It's a casino out there, and the tables may or may not be rigged.
See the same article in paranomic vision @ www.contrarianthinker.com
K is the Kondratief constant, the wavelength of a Kondratief wave - it may actually be a slow moving variable, related to the lifespan of the average central banker.
All images and text copyright contrarianthinker 2003 except the chart that started off this article, reposted here in good faith for reference.
The naturally occurring gold-silver alloy is called electrum.

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