Saturday, October 15, 2011

2011.10.15 DJIA 1928-1932 and 2004-2012

click on images to enlarge

Rather than another tedious 1929 to the present comparison, here is a less tedious one. I wanted to highlight a couple of points. The first is that the spread between the actual price and predicted price, as measured by the yellow Z-score has now broken the record for historical extremes on the upside.

The second point is made by the red circles on the charts, showing where flat patterns developed during relief rallies just after 1929.  The technical term for this is "frog jumping down steep hill" also known as "the toad tilt."

These time series are multifractal, as discovered by Benoit Mandelbrot and others.  This means that scaling may occur simultaneously along the time and the price axis. In other words, one pattern may match another by stretching or compressing both time and price scales.

If this model is correct, we should soon be traveling down a steep slope, probably by next week. If prices increase much more, or even stay relatively static for a few trading days, and the Z-score goes to >5, then I'll have to retire this structural equation cycle model.  Either way, there is a lot to be learned depending on what happens next week.

I'll be answering some thoughtful posts over the weekend, good luck and good health to all!

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Friday, October 14, 2011

2011.10.14 DJIA: Long $ Short Term Predictions

click on images to enlarge

In honor of this historic occasion, I have represented the very long term DJIA chart above.

If I was long this market, I would be very very afraid.  According to this model, this level of divergence was last seen in 1929 where the actual price is so much higher than the predicted price. There are other instances of higher divergences, but they have always occurred on the downside, not on the upside.  Of course, "this time it may be different."

I would rate the chance of a significant correction next week to be extremely high. Of course, it is also possible that this particular cycle model may be ready for /dev/null or the bitbucket, or the dustbin.  I don't think so - but I'm biased.

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2011.10.14 Gold: Long $ Short Term Predictions

click on images to enlarge

This is the fourth time this year that the divergence between the actual price and predicted price has reached z>2. All of those times were associated with reversals. The probability of a reversal is very high in the next 5 days +/-.

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Thursday, October 13, 2011

2011.10.13 Silver: Long $ Short Term Predictions

The last few times that the spread between the the actual price curve and the model prediction curve reached 2 SD units, a correction occurred in less than five trading days.

Links to previous silver cycle model charts


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Wednesday, October 12, 2011

2011.10.12 DJIA Z-score of cycle model differences

Click on the image to enlarge.  To keep the chart simple on the cycle models, I use the absolute value of the z-score, since it is a symmetrical function. In this case, the sign value (+ or -) shows the direction of the expected reversal. Thanks to Greenface over at daneric's site for asking the question that inspired this.

Viewed in a historical context, this EOD chart suggests we are approaching historical extremes not seen since the mid-50's as well as other economically unpleasant periods in the past.

Edit on 2011.110.12 at 16:30:  I prettied up the chart and used EOD DJIA data rather than the 2:00 PM market price level.  The story is the same.

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Tuesday, October 11, 2011

Cycle Models: DJIA Long $ Short Term Predictions

Today, the DJIA actual price curve has moved almost 2 standard deviation units from the model curve, so here it is for the record.  This is an extreme value suggesting that a correction, which would bring the two curves together, is probably not far off.  Or this model is broken.  I'd vote for the former, but I'm biased.