Let’s talk about sudden reversals.
Sometimes in the natural world, things happen with a bang.
These events are not usually common, and so may seem outside of the natural order. But they are not. Sudden change is also part of the ordinary process of evolutionary change.
We grow used to thinking that most change occurs gradually over time. The step-by step change that we have talked about in previous chapters seems like the norm. We have seen how things commonly grow and change through a process of advancement followed by consolidation followed by another directional move, followed again by consolidation or congestion. It is the consolidation or congestion that makes things seem so normal, because it gives us a chance to get used to a new level, a new environment, a new arena.
But when big-time change comes whirling in from left field – that we can find very unsettling. We speak here of major, sudden incursions from another dimension – something catastrophic, or radical. Things like volcanic eruptions, floods, tsunamis, hurricanes and tornadoes, sudden plagues, big-time wars, atomic explosions, asteroids hitting the earth, and so forth. Sometimes the environment changes almost instantly in ways that cannot be predicted with conventional tools. And the consequences can be immense – the end of one or many species, the birth of a continent, the rise or fall of civilizations.
In the market we see such sudden change on scales small and large, and we see them all the time. Sometimes they show up as big gaps, sometimes as sudden reversals in trend, a reversal without the intervening action of consolidations and congestion. The cause usually stems from unexpected market information, such as a crop report that upsets forecasts in a radical way, unforeseen central bank intervention, a war starting or stopping, weather anomalies, an assassination, a government falling or a revolution succeeding.
We hold that trend reversals are natural, that they will occur a certain percentage of the time. We further hold that they can often be predicted, based on the context within which the energy is flowing. But regardless of whether or not they are foreseen, all trend reversal situations must needs be handled with the tools of a trading methodology, whether Drummond Geometry or something else. A trend reversal is just another type of trading, nothing more, nothing less. The fact that it may stem from a major fundamental shift in market conditions is not material for our purposes.
Let’s think about unexpected phenomena in the world.
We know that energy flows back and forth in ceaseless waves and cycles. We know that opposing energy flows create a dialectic that pushes and pulls in different directions until a resolution occurs and the energy forces move into equilibrium or, more likely, fresh energy enters the scene and a new dialectic occurs.
Seen in this light, trend reversals are easy to understand. They occur when one side of the energy flow is momentarily unopposed, either because one side is very strong, or because one side becomes very weak. Simple mechanics.
Weakness is not always immediately apparent however, and when it suddenly becomes obvious on a sudden move, then we can see a trend reversal.
Many market moves based on crowd perception are rooted in lies. Often in the world we see illusions or falsehoods or lies that are accepted until tested but when put to the test crumble immediately and collapse in utter shambles. Say we have a strong trend build on a falsehood. Perhaps we can take some nameless Asian bank as an example, where the growth in the bank’s stock seems perfectly justified until one day it comes out that billions of the bank’s loans are not only non-performing, but they are worth less than five percent of the value shown on the books. Some of the loans don’t even exist. In other words, the bank’s seemingly solid facade, with its gleaming headquarters and legions of brightly scrubbed young clerks, is a sham, a lie, a fiction. With the lie suddenly exposed, the stock collapses in an instant. We see a trend reversal with a vengeance. You can forget about normal congestions under conditions like these.
In other words, the crowd is not only not right, it has never been right, or at least has never been right except in the earliest stages of the trend. The whole deception is built upon a lie. When the crowd discovers the lie, it capitulates all at once and there is a radical and unstoppable reversal. Usually the crowd wants revenge and blood in the streets is not unheard of.
Cultural distance helps in discerning such lies. We find many observers able to speak about how unwilling the Japanese are to accept a loss, and their strange willingness to carry losses on their books for long periods of time in the hope that face will be saved and the market will make them right. European and US observers have an easier time seeing this than do the Japanese, who look at themselves from within their own culture and do not have the benefit of a different cultural perspective.
But the phenomenon is universal, and the Japanese are alone in their willingness to accept illusions as real. The U.S. plumps merrily along with the highest rate of incarceration in the world, utterly oblivious to the time-bomb building within its bulging prisons and without regard to the consequences of seeing 25 percent of the young male minority population involved with the criminal justice system. The outcome of large-scale social inequality is rarely happy, yet the U.S. cannot hear the trenchant critiques that are common currency among European and Asian commentators.
Every crowd has it culture, and every culture has its blind spots, and it is common in every society to find lies and untruths growing in power until some sudden disconnect draws attention to the falsehood, or the emptiness, or the abuse of trust, or the absurdity, or the crime. And then the change can be very abrupt indeed.
So some trend reversals stem from energy suddenly unopposed, when the opposing energy collapses. Other trend reversals stem from a sudden influx of great power.
Here we look to natural causes as examples, because they are so dramatic, and the dramatic is easy to understand.
When the volcano erupted outside the lovely Mediterranean town of Pompeii in the year 79 A.D., it put an instant stop to the thriving community there, a trend-reversal of major proportions. Life in that region took a sudden about-face and bleakness, struggle, and torment ensued for generations there.
When an undersea earthquake off the coast of Sumatra in 2004 pushed the seas into a tidal surge, the sea coast villagers suddenly faced a wall of water as much as a hundred feet high. The tsunami instantly and irrevocably changed their lives, washing away homes, businesses, schools, families, hopes, dreams – everything, leaving only mud and rot in its wake. That’s a trend reversal, big-time.
Of course sudden interventions come to the upside as well – lottery winners are the classic example, but rain following a drought, an advantageous harvest at sea, a windfall profit – all can bring a sudden trend change to the favored group or individual.
Our dramatic examples mask the truth that trend reversals due to overwhelming power occur in all time periods, or all orders of magnitude, and often result from the energy of one order of magnitude impinging without opposition upon another. Asteroids are common in space, as insignificant there as flies are on earth.
But when as asteroid hits the earth – now that’s a major event. Most scientists believe that the reign of the dinosaurs came to an end following a major asteroid impact in Mexico off the coast of the Yucatan. This collision which threw so much dust in the air that it changed the earth’s climate and the ecosystems on which the dinosaurs depended disappeared, and so that species and many more died out.
What we see here is a routine event in one order of magnitude creating a huge effect when it impinges without opposition on a lower order of magnitude.
And so it is in the markets. A small glitch in one time frame will take on earthquake proportions in a lower time frame, if it lands there with no force to oppose it.
Our view is perhaps more radical than most. We see all phenomena, even the unexpected, as a reflection of energy flow in the universe. We see energy in wave-like actions as the norm, but when the unexpected comes, we do not see that as falling outside the framework of our energy-driven view of the universe as a whole. We see it as part and parcel of the same processes and the same phenomena. It is just that the scale is larger, and the mixing of scales can make manifest a sudden shift in energy.
Can trend-reversals be foretold and forecast?
In the market, yes, sometimes. It is often possible to discern the possibilities, and sometimes we can see that the line-up of energies is likely to result in an overwhelming mismatch of energy. And lies and falsehoods can be discerned, and the crowd perceptions monitored for the inevitable collapse.
But the emphasis in our thinking, and planning, and doing, is healthy if we are always aware that sudden change is possible, and may occur at anytime. When we see an existing trend run come to an end, we must be alert to the possibility that a sharp trend reversal can occur, and that congestion may be absent. We can always plan for such an event, since it may occur anytime, and will occur sometimes. We hope always to be aware that sudden change is a normal part of life – the unexpected, the unpredictable, and the unusual. We are alert to it always; it is what makes life a challenge, and what makes life interesting.
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