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Cycles and fractals

IF you never had the opportunity as a kid to lie on your back and pick images from cloud formations, you came into adulthood unprepared. Not being able to experience seeing your pet dog—or now the silhouette of Miss Universe Catriona Gray—in puffy water vapor created a hole in your life.

The same could be said about not having been on a beach watching the surf break on the shoreline. Both experiences teach two of the most important things about how the world works—cycles and fractals.

Since the dawn of time, humans faced a soul-destroying straight time line that seemed to have no beginning or end. Our existence was birth, life and death. The world always moved forward—never backwards —and was punctuated by comets, volcanoes and earthquakes that were unpredictable.

At some point we came to realize that there was an order, a repetitive cycle to the universe. If it was all on a straight line like a path through the forest, then we should have been able to stop the journey. Therefore the birth, life, death thing was actually a cycle. Many ancient philosophies institutionalized the process to believe that the life cycle was something that was repeated over and over until you found the way to get off the merry-go-round.

The natural world exhibited hard cycles. Halley’s Comet was not a blip on the road to eternity. First marked on recorded history in 240 BC, it returns every 75/76 years. The Earth’s axis rotates (precesses) as a spinning top does and makes a complete journey every 26,000 years. We deal with cyclical behavior no matter what the system is that we have under study.

All asset prices, whether stock market or commodities, follow a cycle even if it is not set to a fixed time frame like Halley’s Comet in the sense that people have different life spans.

The price is flat, and the asset is under accumulation. Then it goes higher during the breakout phase. At the top, the price is flat again and the asset is under distribution. Then a fall in price. Accumulation. Breakout. Distribution. The comet travels toward Earth. It passes the Earth and then travels away to return again.

Now you can tell me that the cycle thing is all a bunch of garbage when applied to anything but comets and human life. Here is the proof: The Dow Jones Industrial Average is higher today than 100 years ago. The same is true for the PSE for at least 30 years, which brings us to fractals.

Fractals are defined as “infinitely complex patterns that are self-similar across different scales. They are created by repeating a simple process over and over.” The genius who coined the word was Polish-born mathematician Benoit Mandelbrot, who died in 2010.

While what we see is a very complex pattern, it remains the same when we look at the tiny or the big picture. Lying on the beach, looking at the water lapping lazily on the sand, we see the exact same shape/pattern as the wave for a 50-foot high tsunami. A grain of sand has the same complexity as a mountain range with peaks and valleys. A fern is composed of branches that are composed of branches, which in turn are composed of branches.

Within the massive accumulation, breakout and distribution that we see on a multiyear basis, we can see the same cycle/pattern on price action on a daily, hourly or even shorter time frame. That is a fractal of a cycle. That is our world, and that is the stock market.

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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

 

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