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Complexity Analysis



Editor's Note: The following analysis was offered this morning via Scott Reamer's technical service. We share this vibe with educational intentions only. For more information regarding Scott's unique approach, please click here.

In our Complexity Analysis, Friday's decline suggested that it was possible that last Wednesday's peaks were THE peaks we were looking for. However, the strong bounce this morning past important resistance levels have now winnowed down the important possibilities:

As I write, in the next several days DOW 10,450 (potential 10,500) and SPX 1206 (potential 1210) are likely to be seen before the potential for a large and momentum-driven decline in equity prices sets in.

This action, and our subsequent model changes (originally DOW 10,485, then bounce complete at 10,435, now back to DOW 10,450) illustrate nicely an important characteristic of our model: that of probability distributions.

Scientists and academics are currently attempting to develop methods to describe and model complex systems. These statistical equations are focused on measuring probability distributions rather than certainties and thus differ critically from traditional asset pricing models that will indicate a stock is worth, say, some certain net present value.

These traditional models ignore the important - nay essential - role that emotion, irrationality and feedback loops play in negotiated asset markets. At any given moment the probability of an increase or decrease in prices exist; our models attempt to measure that probability based on the characteristic of scale invariance. But those probabilities change in real time as prices change.

We think the latest counter-trend, mean-reverting bounce from June 27ths lows is likely NOT complete and needs a new swing peak above last week's peaks to complete.

There are several levels we are watching: DOW 10,450 then 10,500 and SPX 1206 then 1210.

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No positions in stocks mentioned.

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