In a recent article, I introduced the notion that the Heisenberg uncertainty principle provides far more insight for investors and traders interested in market cycle analysis than the infamous Hindenburg Omen. Feedback from readers suggests many appreciated this new line of thinking, while others challenged the proposed application of hard science principles to the softer social science of the study of economic and market cycles. In this article, I will further explain precisely what I am proposing about human action, including yours, and the Heisenberg Omens.
Quantum field theory applied to social cycles is a rather radical notion. The Austrian school believes business cycles are exclusively the product of monetary policy. Keynesians think they can control business cycles with monetary and fiscal policy, in spite of the mounting evidence, including piles of festering global debt, to the contrary. The carnage in the wake of bad monetary policy throughout history suggests the Austrian’s are far closer to the truth, but quantum field theory provides a possible explanation of why business cycles are there in the first place. It explains why bad monetary and fiscal policy produces extreme cycles. Instead of being the background noise of human purpose and progress, they can become full-blown, edge of the abyss, global crises.
Field theory offers a new horizon in global stock market and technical analysis. If the basic approach has merit, and the evidence is mounting every day regarding what appear to be fields of human action in global markets, the implications are rather far reaching. This includes the future of your nest egg, or that multi-billion dollar hedge fund you are managing. Field theory may provide a heads up regarding that heretofore-unpredictable black swan event that may be over the financial horizon.
First things first, the implications of the work of James Clerk Maxwell (1831-1879) require a brief introduction. Maxwell was a Scottish theoretical physicist and mathematician that discovered the electromagnetic field. His contributions to science are considered to be on par with Albert Einstein and Isaac Newton. Maxwell’s work in field theory is the basis of much of the work of Einstein, and helped inspire Einstein to formulate the theory of special relativity. The following are quotes regarding Maxwell’s work in theoretical physics:
” … he conceived and developed the nature of the field and established the reality of the field as the underlying reality of all spatio-temporal (space-time) phenomena.”
“Maxwell’s equations are laws representing the structure of the field .… All space is the scene of these laws and not, as for mechanical laws, only points in which matter or charges are present.”
If you take these two quotes at face value, you have to accept that there is the distinct possibility that anything occurring in space-time, including you reading this article, is occurring in a field. Anyone that has witnessed pure unadulterated global financial panic, such as 2007-2009, or the ensuing rally, is aware that the madness of crowds is an indication of some sort of field of groupthink. Whether we can track such social fields is the real question.
If you have ever studied a stock, bond, gold or commodity chart you cannot help but recognize that they manifest field like characteristics. From fear induced pessimistic troughs they rise to delusional heights of unfounded hope for future returns, driven by bouts of optimism and the madness of crowds. Then the recognition of reality and gravity kicks in and the cycle tops and tumbles to a low, starting this human action driven market cycle process all over again. Undoubtedly, all these different scale market cycles of boom and bust exhibit field like characteristics.
Here is where Heisenberg kicks in. The Heisenberg uncertainty principle states that certain pairs of physical properties, position and momentum being some of the favorites of the hard science physicists, cannot be simultaneously known to a high degree of precision. The more accurately you measure one property, the less accurately you can measure the other. Heisenberg’s microscope thought experiment is used to explain the uncertainty principle and illustrates that the instrument that measures the properties of a field interferes with and affects the measurement. Essentially, the instrument affects the field and can change it.
Now we all know that investors and traders are keenly interested in the two properties of price and time. These two properties determine your entry and exit from investment or trading positions. Fortunately, both of these properties can be measured simultaneously with an acceptable degree of precision for a specific security or asset, otherwise trading and investing would be a rather confusing proposition. However, if you add millions of such transactions together in a market index, they reflect a sum of human action that manifest as an ebb and flow with field like characteristics.
When you make a decision to buy a house, sell a car, buy a stock, or short the municipal bond market, brown bag it, go out to lunch, or go to the gym, a special scientific instrument is at work. The instrument at work is your God given mind and your reason, your human will in action. Your decisions are based on objective as well as subjective inputs from an untold number of sources at work in the field of human action including potentially your reason, your emotions, your boss, or your spouse. Your individual decisions are a part of the economic field in space-time generated by human action. You are affecting the field of the business cycle and related market cycles, directly or indirectly. Your human action produces real results and affects the field of human action. Your human action counts and helps create the field.
When millions buy houses with excessive amounts of debt at historically high prices, it sends ripples through the field of global economic and financial activity. When Chairman Bernanke of the Federal Reserve embarks on a $600 plus billion dollar QE policy, or lower interest rates, it has an impact on the economic field and stock market cycles. In fact, that is specifically why he is taking action. Based on the application of his reason and input from the Board, he is attempting to alter the field of human action and its outcome.
Granted, the proposed cross-discipline application of fields has more than a few hurtles. The field theory approach to economics and market cycles suggests that all financial and economic activity is occurring in fields of human action. When Chairman Bernanke, and his staff, measure prices and pursue policies to insure “maximum” employment, the human mind is the instrument that is doing the measuring and then taking policy action, and affecting the reaction of millions in various fields of human action that are affecting markets. Are these measurements or the policy action accurate? Whether they are or not, they are being absorbed into the field of human action that you can observe unfolding on a stock chart.
Pursing answers to the questions generated by the application of fields to human action to the economy and market cycles, I read Aharonov and Petersen’s Quantum Theory and Beyond, who suggested:
“…to measure the momentum of a field according to the canonical method one would need an interaction proportional to the momentum and to some external degree of freedom belonging to the apparatus.”
For students of stock market cycles this notion of an external degree of freedom immediately brings to mind Fibonacci ratios, which appear to represent degrees of freedom at work in all manner of markets and nature. There is a long history of the application of Fibonacci to financial markets and stock market cycles in price and time.
This idea of degrees of freedom began many years of testing new approaches of Fibonacci in price and time against the long wave family of stock market cycles. It has created an entirely new approach to stock market cycles, as well as cycles in bonds, gold and any asset that prints a record of price and time on a chart. What I have discovered suggests that cycles have “ideal” lengths, but they fluctuate in Fibonacci degrees of freedom in time.
It was the late great PQ Wall who first suggested, to my knowledge, that there is a corollary between quantum field theory and the fields of human action in global stock markets. The global long wave cycle of boom and bust, discovered by Kondratieff, is just one such a field of human action. However, it was also the brilliant mind of PQ Wall that proposed that a long wave divided by 144 is the 20-Week trader’s cycle, and a miniature long wave, the cycle I rechristened as the Wall cycle in my book The K Wave (1995) McGraw-Hill.
The chart below demonstrates the Wall cycle fields of human action unfolding in the S&P 500 since the infamous March 2009 bottom. There are nine Wall cycles in every business cycle. The cycle that ran from July 8, 2009 to February 5, 2010 was an exact 50% extension of the “ideal” 141.9-Day Wall cycle. The hundreds of billions of dollars in well-intended interference of the ebb and flow of the field known as the Wall cycle have make tracking cycle in price and time a lot more difficult. Nevertheless, if this field theory method has merit, human action in the current Wall cycle field has been pushed optimism about the future to an extreme, and has stored up what will be a potent antidote of pessimism into the upcoming Wall cycle bottom.
Fibonacci applied to the notion of degrees of freedom in ideal cycles in time has created an entirely new approach to tracking cycles in time, from the long wave to the 20-Week cycle and the smaller cycles. The Fibonacci 50% extension degree of freedom is projecting a bottom in late January, while the golden ratio degree of freedom in this Wall cycle is coming up in mid-February. However, it should be noted that the Wall cycle bottom in key emerging markets likely came with the November/December weekly stochastic lows in certain markets. Developed markets do not look like they have transitioned from the Wall cycle field that began on July 1, 2010 to a new cycle field.
The Fibonacci price drill-down grid method I created based on decades of Fibonacci price grid research has discovered what appear to be an entirely new approach to the degrees of freedom in the fields of human action at work in price. From price in the big cycles down to intraday cycles, all markets appear to be driven by interconnected fields of price action, clearly driven by human action. Below is the current Level 2 drill-down Fibonacci price grid. This grid is derived from the Fibonacci targets between two sequential Fibonacci targets in the Level 1 grid. The Level 1 grid is produced from the S&P 500 1982 intraday low and the 2007 intraday high. Further drilling down into the Level 3 and Level 4 grids, to reveal the intraday grids, will change your view of stock market cycle analysis in price forever.
The Fibonacci turns in both price and time are essentially Heisenberg Omens. These Heisenberg Omens can be used by investors and traders to identify important turning points in price and time. After identifying the active Level 1 grid in any market, investors and traders can use the Fibonacci drill-down grids as a highly practical method for indentifying entry, exit and stop loss targets in any market in the Level 2, Level 3 and Level 4 grids. The S&P has now moved into the Fibonacci Dynamic Web Normal range in the Level 2 grid.
The actionable takeaway is that an overbought Wall cycle is topping now. If the market drops back below the inverse golden ratio target of 1278.95, which it struggled to get above, the market is likely headed for a Wall cycle low. Shorting using the SPX, SDS or SH if it drops below S&P 500 1278.95, with appropriate Level 2 or 3 stop loss protection, could be an appropriate strategy at this time for traders that understand the risks. Targets in the Level 1 and Level 2 grids will help identify the upcoming low of the Wall cycle. The March 2009 Wall cycle low was right at the 38.2% Level 1 target. The July 2010 Wall cycle low was at the Level 1 golden ratio target in the S&P 500 of 1013.
The chart below demonstrates the Level 2 Fibonacci drill-down targets around the Level 1 target of S&P 500 1228. You may agrees with subscribers that have observed that the drill-down Fibonacci grid lines on a chart read like sheet music.
The instrument of human action produces Fibonacci ratios in markets in price and time. Fibonacci Dynamic Web targets in the Level 4 grid often turn the market down to one-one hundredth of a point. These reflect the degrees of freedom in human action in global markets and in stock market cycles. They are regular Heisenberg omens, reflecting the instrument of the human mind and human action at work in the global marketplace, exercising reason in pursuit of purpose.
Global markets are currently at an important inflection point in the fields of human action in the Wall cycle. The human action of Chairman Bernanke is attempting to control the human action of most of the developed world, which is in the midst of the great debt deleveraging of a long wave winter season.
The May 2010 flash crash was a release of pent up energy from artificial stimulus in the fields of human action on the way to the Wall cycle bottom on July 1, 2010. The central banks and governments of the developed world have now doubled down, attempting to prevent the fields of human action from turning south, even for just a healthy and always temporary reset of human action sentiment. Should we be trying to eliminate the fields? Would it be wise to eliminate the natural winter if we could? It would destroy the world if we did. What is it we fear so much?
It is worth pondering whether the central bank sponsored human action that has injected hundreds of billions in stimulus has overridden the expected field, and launched a new one. Alternatively, has it merely postponed the day of reckoning for this Wall cycle? We will get the answers to these questions shortly. We are riding the fields together. All fields of human action end and the baton is passed to the next field in the space-time continuum of the human odyssey.
Stock market charts reflect the human sentiment of fear and its associated human action that brings regular bouts of selling to markets. Such fear now appears suspended in space, but time is still ticking. An extreme in the human action driving sentiment of optimism has unfolded. Fear is marking time.
Human action, yours included, like Chairman Bernanke’s, is a powerful instrument that can alter the outcome of the fields of human action, but not eliminate them. Nature has imposed degrees of freedom. Human action has built and destroyed civilizations over the millennia. Maybe during this long wave winter we will have an opportunity to get human action right, and deliver a new golden age of peace and prosperity. I like to call that possibility The Great Republic. It is closer than you think. It only needs the right human action.
David Knox Barker is author of Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, Updated and Expanded Edition (2009). He is the founder of LongWaveDynamics.com, and the publisher and editor of The Long Wave Dynamics Letter. Permission is granted for this article to be reprinted if credit is given to the author and a link is provided to LongWaveDynamics.com.