by Rick J Ratchford
There are several books on the subject of Cycles, Geometry, Formations and so-forth that relate to the markets. All these fall under what is called Market Symmetry.
The markets follow a natural order or law. Nothing in the universe can escape the laws that surround us. Plants, animals, people & geography all play to tunes of the natural sound track.
Since so much has been written on this subject, I'm not going to get into detail as to how each are affected by the laws of nature. What I'm going to deal with in this article is simply the symmetry found in the markets and how they can be useful in determining a trade.
Market geometry flys in the face of random market action. There are some who believe that the movements you see on the price charts are the result of random action. However, enough information is available for the astute reader to come to the realization that the patterns you see on a price chart simply could not happen randomly. The ratios within the patterns are mathematically related to each other to form geometric shapes, which upon discovery can lead you to locating major market turns.
I recommend for those new to this subject to consider the study of Fibonacci. As a beginning trader back in the summer of 1990, just prior to the Desert Storm war, the markets appeared to be a jumbled mess of lines moving up and down without any clues of where it might go next.
Indicators such as Stochastics were brought to my attention, and I soon discovered how easy it was to lose a few thousand to something that lagged market action. It was early 1991 when I learned about Fibonacci, and that jumbled mess didn't look so jumbled to me anymore.
There are many traders who like to look for 50% retracements, or for support and resistance by noting previous support and resistance that formed those market tops and bottoms. The reason this actually works to some degree is because those fall into a geometric pattern.
When you bought your first book on market analysis, what were you quickly introduced to? That's right, triangle patterns, flag patterns, rounded bottoms and tops, channels, etc. What do you think those are? Triangles, squares, circles and rectangles. Right?
You are being taught to recognize the shapes of these geometric patterns without being given a reason why they form, or how you can determine where one will start and another will end. The only clue you are given is to watch for a “break-out.”
In going back to the subject of Fibonacci, there are a few geometric ratios I would like to share with you now. Those would be the following (.382) (.618) (.786) (1.00) (1.272)(1.618)
These are just some of the related ratios of Market Geometry. I'll briefly demonstrate how they are related.
First off, 1.618 is called the Golden Mean. It appears in the growth patterns of plants, the human body, seashells and many other things found in nature. Even the planets follow a pattern based on the Golden Mean. For example, for every time the earth orbits’ the sun, Venus orbits the sun 1.618 times. The relationship between Venus and the Earth is 1.618:1.00.
(.618) is the reciprocal of 1.618
(1.272) is the square root of 1.618
(.786) is the square root of (.618)
(.382) is (.618) squared
If you take a right triangle with a base of 1.00 and a right side of 1.272, the hypotenuse of that right triangle would equal 1.618. Also, if you take a right triangle with a base of (.618) and a right side of (.786), the hypotenuse would equal 1.00.
So now you can see how they are all related.
Now it would be very difficult to go into every ratio, and all the applications there are in using them. I can however encourage you to buy all the books on the subject if you so desire to learn this fascinating field of market study. But for now, let us consider a real life example using the daily June 99 Bonds chart (all values are in decimal to make the math easier.)
On January 11, 1999 a low was formed at 123.53. The next major top was on January 28th at 127.69. By taking the range of this climb, we can derive expanding support and resistance levels using those ratios shown in this article.
The top refers to January 28, 1999. The bottom refers to January 11, 1999.
(1.00) ratio from the top provided us with the reversal bottom on February 8th (.382) from the bottom provided the support for Feb 12th. (1.00) from the bottom provided the March 4th bottom. (.272) from the bottom provided the top on March 17th. (1.00) from the top provided resistance to form the top of April 9th. (.272) from the bottom provided the resistance that formed the double top on April 21st and April 30th. (.786) from the bottom provided the support to form the April 26th, bottom. (1.382) from the bottom provided the support for the recent May 12th bottom.
Coincidence? Random? You decide. But to this market analyst, this is purely market symmetry.
Now, I'm going to use market geometry to determine the likely bottom in the T-Bond market, which has yet to happen. On May 16, 1999 and the current bottom in the T-Bond market is 116.90 made last Friday.
I'm going to use this time the weekly charts because I'm expecting a weekly bottom to occur during week ending 5/21. This is based on a geometric mathematical algorithm that I use to help determine weekly and daily reversal dates called Wdates and Fdates. The algorithm is not available to the public, although the dates are.
On the weekly charts, note the weekly top made week ending April 9th. The previous major weekly bottom was made week ending March 5th. And most recent weekly bottom was made a week earlier from the top, during week ending April 2nd.
The range from the April 9th top to the March 5th bottom is 4.31. (.618) of that is 2.66. Expand 2.66 downwards from the March 5th bottom and we arrive at 116.62 or 116:20 in 32nds. (T-Bonds are quoted in 32nds.)
Now, take the range from the April 9th top to the April 2nd bottom and we get 3.908. (.786) of that is 3.07. Expand down from the April 2nd bottom and we arrive at 116.62 or 116:20 in 32nds.
Do I have your attention now?
But here is something else. If you take those same two ranges and expand them out (.786) and (1.00) respectively, they both intersect around the 115:25 to 116:00 area. And to further this geometric picture, if you take the bottom made week ending November 6, 1998 and draw a trend line from there underneath the March 5, 1999 bottom and into the future, it intersects the 115:25 - 116:00 price area for week ending 5/21. That happens to be the same week we are expecting a weekly bottom to occur based on our date algorithm.
And since we are still on this chart, if you take the top made week ending December 11, 1998 to the November 6th bottom and expand it out by (1.382) from the bottom, we again arrive at the 115:25 - 116:00 support area. And if we take this same range and expand down from the bottom by (.786), we get the support price that formed the March 5th bottom!
Okay, I think you get the picture by now. Nothing random about any of this. Purely a mathematical way of exposing the geometric picture of the markets. We have discovered that major and minor market tops and bottoms are related to each other in some geometric form, which may not be clearly visible to the eye (geometric shapes are actually 3 dimensional, whereas the charts are only 2 dimensions). Try to visualize the market forming a cube on a 2 dimensional chart. Get the picture? However, by simply exposing the ratio relationship of previous market action, we can determine probable market behavior to a point. As traders, we deal with probability. This is certainly not the Holy Grail by any measure.
Some may ask why would I share such information. Isn't there the chance that it could affect future market behavior?
There are a few reasons why I do not believe this will happen.
This is nothing new. I'm sharing things I've learned from other sources that are available to the public.
You could actually expose the Holy Grail system to every trader and most will not do anything with it. Some because of a level of skepticism, others because they do not wish to do the work.
These geometric patterns occur due to natural laws. Nothing we do will ever change that.
Take the time and work these out on some of your other price charts. See if you can note the mathematical geometric relationship within the patterns. Some markets will show different types of ratio patterns as opposed to other markets. Get to know your market. As you see, the T-Bond chart is one that I've found to have a nice symmetry to it.
So the next time someone tells you the markets are random, simply hand them some darts and wish them a good day.