Stocks at the Edge of Chaos

Ilya Prigogine, Nobel Chemist and one of the foundational thinkers of Chaos Theory, believed living systems were their most efficient at the edge of chaos, at the border between predictable and unpredictable. Seemingly random or chaotic systems are constantly seeking an underlying order, which causes them to self-organize.  This process has a common fractal, of a plateau at the edge of chaos, followed by a thrust in the direction of order.  When the new order emerges, the system bifurcates into one or another direction.  

The chaos is clearly reflected in two contrary views: the V shaped recovery is at hand, vs. is it a False Spring?, both from the same site.  Similarly, I have been following the China Bubble collapse (just scan down to prior posts), and note that after a sharp thrust down and a plateau, it has continued down, falling almost 7% yesterday with a very minor pause today.  Bargain hunters are preparing to go back in, and yet this report sent to me by one of my readers should chill them: despite the purported GDP growth, internal Chinese rail traffic was down in 1H09.  It is as if the China Transports are de-confirming the China Dow. Bad joss, as they say in Hong Kong. Arguments that the Stimulus Bill somehow got a $13T economy back on track should ponder the attached chart, courtesy Seeing Alpha. The actual fiscal stimulus is trivial.  

Thus we see the edge of chaos as the confusion over what the stats foretell. If the China Bubble is what pulled up Europe and made the commodity countries like Australia look like they avoided a recession, the expected end of the China stimulus by year end, as is being "predicted" by the fall of China's equity markets, and the peak of US stimulus, which is occurring right now, should give the bulls pause.  

The markets themselves can give us guidance as to which direction the plateau is about to head. If the drop down continues with the same or more speed as the rise up, and breaks below the trading range of the plateau, we have bifurcated down off the plateau and will drive lower.  

The past rally can be seen as a thrust off the low in Mar with a plateau in August. The trend has clearly shifted downward. The risk of buying the dips right now is huge; better to stand aside until or unless this downtrend slackens beyond the downward slope we are watching. That slope is the trend up from Mar9 to the recent top, the Thrust off the low. Within that Thurst we have fractals of smaller thrusts and plateaus.  We have blown past the first such plateau to confirm that this downturn won't be quick (the SP1016 level mentioned in my prior post.); and we appear to be in thrust down to a new plateau. If we now break SP978, we have broken out of the next fractal plateau, and the market should then run below the Jul8 low towards the the lows last March and Nov.

In ewave terms, we had a nested pair of down-up 1-2 waves, the first on Friday and the second on Monday (which covered a gap left in the downdraft in the morning). The drop this am is a minor degree "3 of a 3" meaning the strongest thrust down of this pattern.  

In the meantime a whole series of prior investment positions are unwinding. The USD seems *finally* poised to run up. Treasuries are strengthening.  Both show a return of risk aversion, perhaps sparked by the China drop and the Japanese election, where the new party is anti-US and anti-Free-Market. Continued bank failures and the shocking weakness that remains in the US banking system suggests that credit spreads will now begin to widen. Oil broke an important level today, and should drop faster, along with other commodities. 

Perhaps most significant is that the start of the new month did not bring a rally, a new surge of buyers. It appears rather that selling pressure is increasing.  Stand aside and watch the slope of the decline.   

Comments

[Astro Trades]

55 Fibonacci trading days from July low puts us around late September on the Mars trine Uranus cycle for a meaningful top.

If this dip bottoms Friday, it should be nice trade for run to new highs into Mars trine Uranus.

[kallidromos]

Wise advice!!

[dreaming]

dream on

[george]

is glen neely on vacation?

[Miguel]

gold usd further decoupling

[hey]

Neely's Gold trade is taking off, get long while you still can.

Try buying symbol DGP (double long Gold)

Gold may hit $2100 an ounce if US Dollar collapses or Iranian instability.

[James]

Dollar was moving side ways for past 2 weeks, and you should not look for 1:1 correlation.

[James]

Gold may hit $2100 an ounce if US Dollar collapses or Iranian instability.

sounds like TV commercial..

[Miguel]

gold seems to go up..and the dollar is trying as well.
That is the real news

[James]

June dollar index
77.50 on august 4
78.50 on september 2

where do you see the "real news"? you are referring to anticipation of stock market falls.

[yelnick]

george, Neely has been quiescent for the past few weeks. Today for the first time he has popped up with more confidence in his positions: S&P down (key level to watch is 986), rates down/notes up, gold up, and Euro down. I do not follow gold very closely, but STu and Neely both see a fast runup right now. STU then sees a major fall.

[Miguel]

where does stu and NEELY see gold after THIS leg up (first phase ending probably around oct 10, following seasonal patterns?)

[EWI Hates Gold]

Uh huh! Here we go again with EWI. Every damn time since gold broke over $300 those clowns say it is heading to $200. Every damn time it has a nice move up they jump on the bandwagon saying it is going up - DUH! - and will then fall.

Two things:

1) Those clowns at EWI have no credibility when speaking about gold and after a dismal ten-year record should just shut the hell up.

2) All you jokers talking about now is a time to buy gold and you talk about ETFs, GLD, and so forth, need to either study the market or stay the hell out. If you want to buy paper gold, the likes of which has committed each ounce of physical gold by almost one hundred times, then go buy some toilet paper because it will be as valuable in a crash as your stupid paper gold promises-to-deliver.

There are more idiots spouting off about gold and know nothing about the unique market that is gold.

[Miguel]

could yoo please post with using maximum 2 times the word idiot or similar next time?
but independantly on this remark.I think mines are a better deal

[gold]

gold is complex. i sold gold call options two times, and eventually made big money. but for several weeks, i wished i sold puts instead.

big players like rich people, e.g. jimmy, and IMF, make gold market difficult to trade.