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[harvester] 22/12/2002 21:33

well done. Style and form do matter . The mark of a true English gentleman .

[energyi] 22/12/2002 21:30

LOL. (typo fixed)

[harvester] 22/12/2002 21:26

Not a bad trait, energyi as long as you spell it right (for the Brits of course-- Yankees don't count) :-)

[energyi] 22/12/2002 21:19

thanks, Harvester.

I am blessed/cursed with an insatiable curiosity

[harvester] 22/12/2002 21:15

energyi:
I like your poetic style . It is not often that the harsh world of finance gets graced by melodic words worth remembering.

[energyi] 22/12/2002 21:12

LACUNA STUDY
Have a look at this chart for Wheaton River (t.WRM)


Notice how:
The trading range from about C$1.25-1.37 contains two gaps:
1. In the strong rally in late May, and
2. The gap down in late July
...which in hinsight leaves the June/early July trading range looking
like an instable island, which cannot hold the stock. To trade in the
"island range" again, the market has to cope with those (untraded) gaps.

The first attempt through the gap, in September, was meet with
heavy selling, which drove the price back down to C$0.90-1.00,
which will now be important support, IMO. Now, in a stronger
market, that gap is being challenged a second time, and if the
price can breakout above C$1.40, I would not be surprised to see
if rise all the way to the July high of C$2.00+

[energyi] 22/12/2002 21:03

harvester,
Dont laugh. There's a brilliant insight here, I think.

The key is the word:
Lacuna: blank spaces, as cavities in a bone, which help
to define the overall shape and structure

Why?
We can understand things:
By Studying what is there, or
By Studying what is not there...
that is, where the spaces are located.
Or to apply this to markets, where the gaps and single treads
occur on charts. The gaps are as important to the trading ranges,
and amybe more so, since they tell us something about structure.

Areas where buying or selling become so one-directional that such
area was not traded, or was traded only once.

I must ponder on this when I look at charts

[harvester] 22/12/2002 20:50

Stock market crashes are entirely predictable . They usually occur during "falls" .:-)

[energyi] 22/12/2002 20:47

Article: Sect.4

2.4-DISCRETE SCALE INVARIANCE, COMPLEX EXPONENTS AND LOG-PERIODICITY

During our research on the acoustic emissions of the industrial pressure tank of the European Ariane rocket, we discovered the existence of log-periodic scaling in non-hierarchical systems.

To fix ideas, consider the acoustic energy : $E \sim (t_c - t)^{-\alpha}$
following a power law a function of time to failure.
Suppose that there is in addition a log-periodic signal modulation:
$$ E \sim (t_c - t)^{-\alpha}~[1+ C\cos[2\pi {\log (t_c - t) \over \log \lambda}]]. $$

We see that the local maxima of the signal occur at $t_n$
such that the argument of the cosine is a multiple to $2\pi$, leading to a geometrical time series $t_c - t_n \sim \lambda^{-n}$ where $n$ is an integer.

The oscillations are thus modulated in frequency with a geometric increase of the frequency on the approach to the critical point $t_c$. This apparent esoteric property turns out to be surprisingly general both experimentally and theoretically and we are probably only at the beginning of our understanding. From a formal point of view, log-periodicity can be shown to be nothing but the concrete expression of the fact that exponents or more generally dimensions can be ``complex'', i.e. belong to these numbers which when squared give negative values.

FRACTAL DIMENSIONS
During the third century BC, Euclid and his students introduced the concept of space dimension, which can take positive integer values equal to the number of independent directions. For instance, a line has dimension one and we live in a space of dimension three and a spacetime of dimension four. During the second half of the nineteen century and the twentieth century, the notion of dimensions was generalized to fractional values.

The word ``fractal'' was coined by Mandelbrot to describe sets consisting of parts similar to the whole, and which can be described by a fractional dimension. This generalization of the notion of a dimension from integers to real numbers reflects the conceptual jump from translational invariance to continous scale invariance. Science progresses by analogies and generalization, thus allowing to embody in simpler concepts an increasing broad phenomenology. Here, there is a further generalization of the notion of dimension, according to which the dimensions or exponents are taken from the set of complex numbers.

This generalization captures the interesting and rich phenomenology of systems exhibiting discrete scale invariance, a weaker form of scale invariance symmetry, associated with log-periodic corrections to scaling. Discrete scale invariance is a weaker kind of scale invariance according to which the system or the observable obeys scale invariance only for specific choices of magnifications, which form in general an infinite but countable set of values. This property can be seen to encode also the concept of lacunarity of the fractal structure.

(Note:
"Lacunarity": Lacuna: blank spaces, as cavities in a bone, which help
to define the overall shape and structure)

Encouraged by our observation of log-periodicity in rupture phenomena, we started to investigate whether similar signatures could be observed in other systems. And looking more closely, we were led to find them in many systems in which they had been previously unsuspected. These structures have long been known as possible from the formal solutions of renormalization group equations in the seventies but were rejected as physically irrelevant. They were studied in the eighties in a rather academic context of special artificial hierarchical geometrical systems.

Our work led us to realize that discrete scale invariance and its associated complex exponents and log-periodicity may appear ``spontaneously'' in natural systems, i.e. without the need for a pre-existing hierarchy. Examples that we have documented [Sornette, 1998] are diffusion-limited-aggregation clusters, rupture in heterogeneous systems, earthquakes, animals (a generalization of percolation) among many other systems. Complex scaling could also be relevant to turbulence, to the physics of disordered systems, as well as to the description of out-of-equilibrium dynamical systems. Some of the physical mechanisms at the origin of these structures are now better understood. General considerations using the framework of field theories, the framework to describe fundamental particle physics and condensed matter systems, show that they should constitute the rule rather than the exception, similarly to the realization that chaotic (non-integrable) dynamical systems are more general that regular (integrable) ones.

In addition to a fascinating physical relevance of this abstract notion of complex dimensions, the even more important aspect in our point of view is that discrete scale invariance and its signatures may provide new insights in the underlying mechanisms of scale invariance and be very useful for prediction purposes.

(more):

[energyi] 22/12/2002 20:47

Article: Sect.5

3-TOWARDS A PREDICTION OF EARTHQUAKES?

An important effort is carried out world-wide in the hope that... earthquake prediction will be attained. ...The need for a reassessment of the physical processes has been recognized and more fundamental studies are persued on crustal structures in seismogenic zones, historical earthquakes, active faults, laboratory fracture experiments, earthquake source processes, etc.

There is even now an opinion gaining momemtum that earthquakes could be inherently unpredictable [Geller et al., 1997]. The argument is that past failures and recent theories suggest fundamental obstacles to prediction. It is then proposed that the emphasis be placed on basic research in earthquake science, real-time seismic warning systems, and long-term probabilistic earthquake hazard studies...

We ...describe a new direction that suggests reason for optimism. Recall that an earthquake is triggered when a mechanical instability occurs and a fracture (the sudden slip of a fault) appears in a part of the earth crust. The earth crust is in general complex (in composition, strength, faulting) and groundwater may play an important role. How can then one expect to unravel this complexity and achieve a useful degree of prediction? We need to understand the nature of the organization of the crust, then the characteristic properties of large earthquakes and the nature of signatures that could be used for prediction.


3.1-THE LARGE SCALE SELF-ORGANIZATION OF THE CRUST

Seismicity is characterized by an extraordinary rich phenomenology and variability which makes very difficult the development of a coherent explanatory and predictive framework. In the late eighties, we and other groups independently proposed that the concept of self-organized criticality (SOC) could provide a plausible framework. Apart from the rationalization that it provides for the Gutenberg-Richter law for earthquakes, the power law fault length distribution and for the fractal geometry of sets of earthquake epicenters and fault patterns, it has not been exploited until recently to advance our understanding on the crust organization and about the very rich and subtle properties found in tectonics and seismology.

Roughly speaking, SOC refers to the spontaneous organization of a system driven from the outside in a dynamical statistical stationary state, which is characterized by self-similar distributions of event sizes and fractal geometrical properties. SOC refers to the class of phenomena occurring in slowly driven out-of-equilibrium systems made of many interactive components, which possess the following fundamental properties :

-a highly non-linear behavior, namely essentially a threshold response,

-a very slow driving rate ,

-a globally stationary regime, characterized by stationary statistical properties, and

-power distributions of event sizes and fractal geometrical properties.

The crust obeys these four conditions:

-the threshold response is associated with the stick-slip instability of solid friction or to a rupture threshold thought to characterize the behavior of a fault upon increasing applied stress;

-The slow driving rate is that of the slow tectonic deformations thought to be exerted at the borders of a given tectonic plate by the neighboring plates and at its base by the underlying lower crust and mantle.

-The stationarity condition ensures that the system is not in a transient phase, and distinguished the long-term organization of faulting in the crust from, for instance, irreversible rupture of a sample in the laboratory.

-The power laws and fractal properties reflect the notion of scale invariance, namely measurements at one scale are related to measurements at another scale by a normalization involving a power of the ratio of the two scales. These properties are important and interesting because they characterize systems with many relevant scales and long-range interactions as probably exist in the crust.

We have recently tested the usefulness of the SOC hypothesis by measuring its predictive and explanatory power outside the range of observations that have helped defined it. We thus explored how the SOC concept can help understand the observed earthquake clustering on relatively narrow fault domains and the phenomenon of induced seismicity by human activity such as water impoundment in artificial lakes, gas and ore extraction.

We found that both pore pressure changes and mass transfers leading to incremental deviatoric stresses of less than 10 atmospheric pressure are sufficient to trigger seismic instabilities in the uppermost crust with magnitude ranging up to $7$ in otherwise historically aseismic areas. We argued that these observations are in accord with the SOC hypothesis as they show that a significant fraction of the crust is not far from instability and can thus be made unstable by minute perturbations. The properties of induced seismicity and their rationalization in terms of the SOC concept provide further evidence that potential seismic hazards extend over a much larger area than that where earthquakes are frequent.

(more):

[energyi] 22/12/2002 20:19

Article: Sect.3

2.3-SCALING, CRITICAL POINT AND RUPTURE PREDICTION

,,,Physicists ...started to suggest in the mid-eighties that rupture of sufficiently heterogeneous media would exhibits some universal properties... The idea was to build on the knowledge accumulated in statistical physics...to describe multiple interactions between defects. However, most of the models were extremely naive and ...were found to describe size effects and damage properties, but the relevance to real materials was not convincingly demonstrated (with some exceptions.)...

In 1992, we proposed the first model of rupture with a realistic dynamical law for the evolution of damage, modelled as a space dependent damage variable, a realistic loading and with many growing interacting micro-cracks [Sornette and Vanneste, 1992]. ...In this model, rupture was indeed found to occur as the culmination of the progressive nucleation, growth and fusion between microcracks, leading to a fractal network, but the exponents were found to be non-universal and function of the damage law...

In 1993, we extended these results by testing on real engineering composite structures the concept that failure in fiber composites may be described by a critical state, thus predicting that the rate of damage would exhibit a power law behavior [Anifrani et al., 1995]. This critical behavior may correspond to an acceleration of the rate of energy release or to a deceleration, depending on the nature and range of the stress transfer mechanism and on the loading procedure. ...

To get a qualitative understanding ... let us consider the usual way that composite or mechanical systems are designed (for engineering and industrial applications). This may be called the component system, or bottom-up design. First, it is necessary to thoroughly understand the properties and limitations of the materials to be used, and experimental tests are begun. With this knowledge, larger component parts are designed and tested individually. As deficiencies and design errors are noted they are corrected and verified with further testing. Since one tests only parts at a time these tests and modifications are not overly expensive.

Finally one works up to the final design of the entire engine, to the necessary specifications. There is a good chance, by this time, that the global structure will generally succeed, or that any failures are easily isolated and analyzed because the failure modes, limitations of materials, etc., are well understood. There is a very good chance that the modifications to the system to get around the final difficulties are not very hard to make, for most of the serious problems have already been discovered and dealt with in the earlier, less expensive, stages of the process. The reliability and failure properties of such system is the result of a bottom-up approach of the reliability and failure properties of the constitutive elements, in other words calls for a hierarchical modelling.

(What we call)... the "renormalization group" offers a general framework to ... calculate how (a property or) a failure at a given scale may or may not cascade at higher levels.

Based on ...the renormalization group and on explicit numerical and theoretical calculations, we were thus led to propose that:
- the power law behavior of the time-to-failure analysis should be corrected for
- the presence of log-periodic modulations [Anifrani et al., 1995].

Since then, this method has been tested extensively during our continuing collaboration with the French Aerospace company Aerospatiale on pressure tanks made of kevlar-matrix and carbon-matrix composites embarked on the European Ariane 4 and 5 rockets. In a nutshell, the method consists in this application in recording acoustic emissions under constant stress rate and the acoustic emission energy as a function of stress is fitted by the above log-periodic critical theory. One of the parameter is the time of failure and the fit thus provides a ``prediction'' when the sample is not brought to failure in the first test. Improvements of the theory and of the fitting formula were applied to about 50 pressure-tanks. The results indicate that a precision of a few percent in the determination of the stress at rupture is obtained using acoustic emission recorded $20~\%$ below the stress at rupture. These successes have warranted an international patent and the selection of this non-destructive evalution technique as the routine qualifying procedure in the industrial fabrication process.

This example constitutes a remarkable example where rather abstract theoretical concepts borrowed from the rather esoteric field of statistical and nonlinear physics have been applied directly to a concrete industrial problem. This example is remarkable for another reason that we would like to relate.

(more):

[energyi] 22/12/2002 20:14

"If we could accurately predict market movements the market
would cease to exist"...

I'm not so sure.
Blind emotion can overrule common sense.
Why else do people say (and believe) "this time it is different"
at the height of bubbles. Such extreme psychology is needed to move
a market far away from sustainable value.

You can see it (and feel it) right now in the Housing market.

[wageslave] 22/12/2002 19:38

Yes, but the prof cannot predict market sensitive incidents like 911. However, an analysis of herd behaviour coupled to credit crunches may prove to be inciteful. If we could accurately predict market movements the market would cease to exist. Interesting and definetly a move on from applying chaos terory to the market in terms of its spohistication. With fib analysis too there are heaps of different ways to read signals. Thanks energy for you comments and keep posting the useful data you do as it is always food for thought.

[energyi] 22/12/2002 19:31

WageSlave,
Apologies. I did read that, and thanks for making the connection.
I came to the content in the header in another way, thru a posting
that I saw on wsBear. If I had read your more carefully, or spotted
the link, I would have found it sooner.

Perhaps there was an unconscious link. Perhaps by seeing this mentioned
a second time, I was more open to it.

Prof. Sornette may be onto something,
and I intend to study his paper more deeply.
However, I was speaking to a friend of mine this weekend,
who is a former professor of Physics at MIT and is now a successful
Hedge Fund manager. He remains a big sceptic on this theory (as well as
many of the tools I use successfully in everyday trading.)

A good example of his scepticism came on Thursday night, when I delayed
a meeting because I was waiting for 7pm and a possible drop into a Full
Moon low. When it happened, as was followed by a bounce on Friday he wrote
it off as an accident. He said it is lucky that others believe in magic,
so he can trade against them. I said I am happy with magic as long as
it makes me money.

[wageslave] 19/12/2002 21:33

Here you go energyi - on the 10-13 week cycle thread. Do you read comments on your own threads? Respect WS

wageslave - 11 Dec'02 - 00:38 - 28 of 65 edit


Interesting email from 21st Century Alert............

I've long been fascinated by the "frequency doubling" evident in the long term chart of the S&P 500 throughout the bear market. Just at an eyeball glance, it's easy to see that the down and up swings seem to be doubling in length as we progress down the back-slope of the equity bubble.

Here's what I mean:

Such amplitude waves are not an unusual output pattern for a chaotic, non-linear dynamic system -- which the equity markets surely are.

Obviously I'm not the only one who's been observing this pattern in the stock markets. Indeed, a Professor of Geophysics at UCLA has used his statistical physics modeling -- generally used on earthquakes, and studies of rupture and growth processes in the natural world -- and applied them to the financial markets.

His results are fascinating, to say the least.

The Professor, Didier Sornette, and his post-doc research assistants have taken their equations on feedback processes in the natural world, and applied them directly to the S&P 500, to derive a model of its expected future path. These equations describe herding and imitative processes in crowd behavior.

Interestingly, these equations were developed while studying failure mechanisms in materials science. So the way in which cracks and flaws unfold in the natural world is perhaps similar to the way in which information spreads throughout the stock market.

After all, the inputs for the stock market -- human perceptions and emotions -- are just as natural as the weather, or earthquakes, or other natural dynamic processes. The market can and should be studied like any other natural system. Personally I have been moving down this path of study over the last few years. The market should be studied and analyzed like any other natural, chaotic system.l

So without further ado, here is Professor Sornette's prediction for the path of the S&P 500:

The blue dots are the closing prices of the S&P 500 from August 9, 2000 to November 21, 2002. The black line is his physics model of the expected future path as extrapolated from this prior price action. Or, in Professor Sornette's words, the black continuous line is "the fit and its extrapolation using the super-exponential power-law log-periodic function derived from the first order Landau expansion of the logarithm of the price, while the dashed line is the fit and its extrapolation by including in the function a second log-periodic harmonic." (Oh.....that's it .... right.....exactly...)

The red line and its harmonic is the expected path as calculated by the equations as of August 24th. So you can see how this is an adaptive process.

Right now we are on the upswing that should last well into 2003, according to this model. It should go further and last longer than the bears are expecting; essentially, it should end up being roughly two times as long as last year's rally out of the September lows, and may perhaps carry the share price 500 up towards 1000.

The really interesting part comes after this rally phase, when the model calls for the market to tumble to dramatic new lows well into 2004.

Of course these same equations have been applied to the "poster child" of bubbles, the Nikkei average. Here's how that looks:

To me, his process and results are not only fascinating, but also make a lot of sense. I think we should keep these forecasts firmly in mind over the next few years. This would be a market path that would fool many people -- which is the market's job -- and if the reality comes even remotely close to this model than there will eventually be a massive washout coming for the S&P 500 -- to about 650, according to the current projections.

The bears make a great case that we're not even close to working off the excesses of the bubble, and that this process usually ends in just such massive price destruction, accompanied by investor dread and apathy. I don't doubt the wisdom in the bear argument, as history usually unfolds in this way -- my only problem with the argument is the bears feel that this has to happen right away.

Bear markets are tough on both long and short positions, as we've all learned over the past few years. It makes sense that this process should continue for another few years, with the biggest amplitude waves still ahead of us.

Personally, I think this forecast could be a real financial bonanza for us over the next few years. If sentiment and crowd behavior are going to continue to be the dominant market themes, then we should have a real advantage going forward, and should end up making very sizeable profits on this projected path.

If you would like more information on Professor Sornette's work, you can use the link above to click to his homepage, where you can find reprints of his articles. It's dense, but very interesting reading.

Sentiment Dashboard


SENTIMENT TANK: The tank filled up 1% to 61% on Monday. Given the large price deterioration on the benchmark indices of about 2-7% this rise looks bearishly divergent. That is, we saw price action behave more bearishly than sentiment. This bearish divergence suggests insufficient fear, or a preponderance of complacency, which can presage further significant price deterioration. We're looking for the tank to fill up to close to the 71% level, if not higher, before we expect to see a meaningful upturn in the broad market.

In the face of yesterday's large price declines the Equity Put/Call ratio was about .57 and the Index put/Call ratio was 0.77. There is no buildup of profit in bearish bets that needs to be unwound. If there were such a buildup, that could work to prevent a major decline. Without such a buildup the door is open to such a decline.

MID-TERM GAUGE: The mid-term momentum dropped further into the downtrend from 15 to 20 and our Confidence Diffusion Index (CDI) gained two points moving from 3 to 5 and expressing the increasing number of technical confirmations of the decline phase. The phase is still young, however. Important lows are associated with the mid-term gauge reading between 90 and 99 on the downtrend side of this gauge. There's room to run...down.

LONG-TERM GAUGE: The weekly momentum gauge dropped from 15 to 16 and our CDI rose from 2 to 4, all of which further confirms the mid-term decline phase.



theape - 11 Dec'02 - 02:18 - 29 of 65


energyi.

I followed th thread to my graph, but I hadn't actually noticed that my upticks were equidistant. strange but true.

I belive in cycles but it surprised me ( even more so that I hadn't noticed it at all I'd just drawn them). you spotted what I didn't.

however the killer question is I'm long the dow from 8520, and where would I close. far more interestin to me. ( the cycle is a happy co-incidence, but took me back on reflection).

I really hadn't noticed they were cycles ( peering too close to my screen)

[axdpc] 19/12/2002 20:31

energyi,

you are very well-read :-)

[davejb] 19/12/2002 20:13

Energyi....
sorry, I've only just passed back through -
my password/username to that journal seems to be playing up at the moment - I posted a precis of a follow up to this article to my customers a week or so back in fact, in the Dec issue of the journal are two articles - one is titled something like 'making money from what that bloke just wrote' but as the journal site currently won't let me in I'm a bit short on detail I'm afraid
To be truthful I suspect this would best be under the 'interesting, but not tradeable' heading in the main.
As for the earlier comment from whoever on academics catching on late, actually this journal has been running some time, and I recall articles several years back about Wall St luring Physicists away from Academe... Large sums were involved, the area of choice was Thermodynamics. The real point is that the Academics were interested in the ideas, and have published a lot on the markets, but not descended en masse to trade them

[dondee] 19/12/2002 12:37

Yep, all makes sense!!! :'}

[fredbear] 19/12/2002 11:35

i dont think a crash can be seen as to the 'day'(an almost impossible feat because often the signs are so vauge) but i think its quite easy to spot the potential for a top (a major market top) in the weeks/months leading up to the event.In late 87 market mania was rampant! that in itself should have been a sign to lighten up at least.. But i wasnt there..ho hum..

Market bottoms are far easier to spot imho and ill be in to my neck when the time is right (No sign of a Major market bottom yet though and if the bullishness contine amidst falling prices not for a good while yet! :( ).
One thing is for sure and that is i wont be using any TA / math derived system /
astrology / vendor service to tell me that the selling is about to cease. ;)

regards
fred

[chuk] 19/12/2002 11:07

i, for one, don't believe that the Stock Market in itself is predictable, let alone a stock market crash, many scientists and mathematicians have tried over many years to eliminate the noise within stock markets to try and predict or model the present and future using data from the past, however it is always the noise that causes the unpredictability

even TA is not a conclusive predictability tool, it is a tool of probabilities, a head and shoulders for example has a greater than even chance of coming to fruition but it is not certain, the noise can always wreck the prediction

in trying to model the stock market, the noise could indeed be treated as 'turbulence', the bain of mathematical modelling. In the past at university i was modelling mathematically the spread of fire within a building, altering the start temperature here, the air temperature there, the conductivity of a wall, etc etc, a tiny change in initial conditions would cause widely different and surprising results, just ask Lorenz, many of the predictive tools in stock market and economics now try to use similar techniques (to find attractors in effect) and end up with exactly the same problems, having partial differential equations to solve, and this is not ultimately possible.

so, i have condensed alot into a small space here and could go on and on, but basically while longer term trends can be found, and trends within the trends, the further and deeper that one goes into analysis, the more noise (or turbulence) is discovered, and the noise/turbulence can, in some cases, change everything, ie the noise could actually lead to a change in trend, given the right circumstances, but how do you predict this and if it is predictable, can a time scale be put on it? example, reducing of something as simple as an interest rate is an attempt to change the trend, it may work but it may not, but in any case it takes months before you know the answer. Another example would be a currency devaluation, it could work or it could snowball the existing trend. a change in a condition at any stage can completely throw the predictability, if indeed it existed beforehand

In effect, there are hidden factors that cannot ever be predicted, let's face it the stock market (like the weather, population analysis, even a dripping tap) is, in effect, chaotic and not totally predictable and never can be, a small change somewhere can (although not usually but can) create a change, only probabilities can be assigned

[moneybags] 19/12/2002 10:54

As I have said in the past.I was sitting at the screen when the market closed at 4.30pm on Oct 16th 1987 and there was no hint of a crash.
We all know the rest.
The market could crash before today is out.
I love looking at these threads where people who have some whizzo piece of software or charting theory seem to know when it will happen.It keeps me amused.
A nuclear bomb placed in the back of a truck and driven into the middle of downtown New York or London and then detonated would tend to overcome any charting or candlestick or 60 day,3 hour and 32 minute wavy wavy scwiggly line chart I have seen.

Regards , Moneybags