Investidores apertam os cintos. Vem aí muita turbulência nos mercados

[Camisa Roxa]

WEDNESDAY a.m.
February 5, 2003



Congested and Ready
by David Nichols

Over the last week the markets have have been wildly zig-zagging up and down. It's been a case of a lot of movement, without any actual progress.



But it's really not so surprising if you're attuned to the way the markets really work, as chaotic, dynamic organisms. The reason the market hasn't done much of anything over the last week is that there wasn't enough energy built up to go anywhere. There was such a quick, exhaustive move down that the markets needed to pause and congest, to re-charge the potential energy.

To demonstrate this, I'll give you a rare look at one of my "secret" tools -- my measurement of the fractal dimension of the market. Every time I mention this -- and it's not that often -- I get lots of e-mails asking me to elaborate, but for now I'm going to keep a little mystery around this. Part of its value to me is that not many people even know what it is, much less how to use it and interpret it. You never want too many people looking at the same things you do.

I look closely at the fractal dimension of the market to tell me whether the market has enough energy to start a real trend. It also tells me when a trend is fully exhausted. This is really, really good information to have.

For example, I wasn't too keen on chasing trades last week -- during what turned out to be a lot of back and forth movement -- because the fractal measurements were saying clearly that this was a major congestion period, and definitely not a time when the market was set up to make a trendy move. I like to avoid trading congestion periods, as it can be very rough on your nerves, and your trading capital.

Let's take a look at how all this looks on the OEX. I use a 150 minute chart, because after lots of experimentation I've found this to be the time-frame that is best-suited for capturing the moves I'm looking to get in our options service.



When the fractal dimension is high, the markets are congested -- and fully ready and capable of starting a big trendy move. Once a trending move starts, such as the recent downtrend, the fractal dimension starts to reflect the linearity of the trend. The really interesting thing is that the markets can only get so linear, before they have to back off and congest -- which then pushes the fractal dimension back up. It's a constant back and forth between trend and congestion, and it really helps to know where you are in this market continuum.

So it's really pretty simple: After this last streak down, the markets needed to pause. But now we're back in the fully congested zone where really good trends are spawned.

With the markets in a short-term, mid-term, and long-term decline -- the odds strongly favor that the move out of this congestion zone will be a break to the downside.