Sunday, August 17, 2008

Market and the Uncertainty principle

I have often wondered what is the closest phenomenon that compares to the market. I have failed to come up with an answer. It reminds me of the scene in one of the matrix trilogy where the collective mind is tapped into. In my opinion, Market behavior cannot be simplified to a process or a phenomenon driven by a collective mind. It is far far more complicated than that. The market is an uniquely unnatural phenomenon.

However, there a quality of the market that I often compare to something we learn in high school. Its the Heisenberg uncertainty principle in Quantum physics. The market is constantly efficient for one time frame and at the same time inefficient for other time frames. When we try to define price and value for one time frame, we make the price and value uncertain for other time frames. Although I think there are infinite numbers of time scales that factor in the market behavior, we over simply it ( for sanity's sake) to a finite group of participants.

In the prior half of building of the 30 day distribution ( as it unfolded) below, short/intermediate term time frame was in control and the value was shifting lower. It was uncertain when (not whether) longer time frame participants would see value. Now longer time frame has appeared and the value has shifted higher but the short term value is uncertain.

The 30 day profile has developed a spike in the top distribution indicating shift in balance range ( &therefore value) upwards, the 3 day profile however is showing increased Tick and TPO count below the 98 level. We may be in a longer term trend phase, yet the market is showing greater propensity to balance in the shorter term time frame. Cisco futures provides an excellent resource on the Meta profile. I am not a subscriber to his service but I see great value in it.

The 3 day profile below is drawn without Fridays (8/15/08) data and the tpo count of 85/130 indicates a higher probability of a short term balance then a break out. Keeping in our minds that we have increased TPO count and a spike in the highest end of the distribution of the 30 day profile ( indicative of a potential for upside breakout), one has to be ready for both outcomes. I think this is the traders paradox everyday - and the key to it is figuring out who is in greater control. Friday was one such day. and we'll look at it in the next post.

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