When big-time change comes whirling in from left field – that we can find very unsettling.

Theory of Trend Reversal

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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