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This article is going to throw
another idea into the pot about computer based algorithms with an idea
borrowed from Microbiology titled "Quorum Sensing". Nature has been
in the business of survival and evolution for billions of years, so it should
come as no surprise to most that artificial intelligence and computer based
design have been borrowed from studying the human mind. Now what do microbes
have to do with how computer based trading is performed. A short-course in
Microbiology will be required, but it will quickly be tied into how trading
software is "sensing" its environment and how the common investor
can use this knowledge to derail these trading patterns.
Theory
Quorum sensing within bacterial
populations involve opportunistic pathogens slowly dividing and remaining
below the detection of the human immune system. When a suitable sized
population has developed and chemical-based signal feedback from a suitable
population has been established, a series of genes are activated which then
cause rapid proliferation, thereby overwhelming the host and not allowing the
immune system an appropriate amount of time to generate an immune response,
whether it is innate or an antibody-mediated response. Quorum sensing is
dependent upon distribution and concentration of a population which in a
nutshell, a response is based upon a threshold number of components detected
to induce a response.
Insect populations us quorum sensing
to determine where to nest, so at any level, a "component" could be
a chemical-based signal concentration from bacteria or a certain number of
visible insects...there really is no limit to the imagination where this
principle takes place. The important thing to understand is that the
"component must be quantifiable. So, how does this principle fit into
trading?
There have been numerous articles in
publication as of late regarding computer based algorithms and how they can
literally trade. An interesting point stated that 1 nanosecond was how quick
trades could be initiated. Generally for every seller, there has to be a
buyer, so if one computer wants to buy puts or calls, there in theory should
be a an opposite trade hitting the market. The problem with this system is
that naked shorting is often implemented and even if a nanosecond trade is implemented
and then pulled, it can set of a cascade of events that can exacerbate a
trend. Although this sort of trading activity can have short-term
implications, a bull market trend can never be stopped...an example of this
is gold because if Central Banks had their way, gold would still be at
$252/ounce.
Having algorithms based upon certain
technical metrics or tuning Bernanke speech comments into 1's and 0's with
other collective information to generate a sell or buy signal can have
benefits, but if the wrong trade is made, then events such as MF Global can
happen. Quorum sensing requires examination of components within a given
system or systems under study to determine if a certain threshold has been
reached, based upon concentration and distribution. As an example, 5x106/unit
area represents a trigger for a quorum sensing response, but if it is spread
out over a larger area (distribution), the concentration is not at a
threshold level to generate a response. Area could also apply to
demographics, or more importantly, volume.
The notion that volume precedes price
is an stock market adage as old as the hills, yet
this has direct application in today's market. Volume sounds simple but it
has many derivative measurements that can quickly make one's head spin:
shares/minute, ratios of share changes in a given sector, integral of share
volume, $/number of shares/minute etc. Etc. What could take an individual a
solid day to compare metrics can be completed by a computer in a very short
period of time, with an answer spit out as "buy", "sell",
"short" etc.
Each individual component of a
computer algorithm may be simple, but layering many different components into
the mix with integrals (summation) and derivatives (rate of change) quickly
becomes infinitely complex but in the end, the generated result is simple,
either DO or DO NOT for executing a trade. With computer based trading,
trying to trade the short-term will work against anyone, because one second
can be broken down into 1x109 seconds (nanosecond), which as Cris Sheridan pointed out is equivalent to 31.7 years. To
succeed, investors must think of time with respect to geological time scales
such as Eon and Supereon if trading can be
performed at 1 nanosecond.
Computer based trading causes events
that may have taken longer to unfold happen in a much more condensed format.
Establishing positions in rising trends with some technical analysis can
alleviate attempts to get thwarted out of positions, but investing in gold
and silver stocks as well as bullion itself have seen most participants
witness the inherent volatility. Never use leverage in these markets, because
a downward move can literally wipe you out...play with the chips you have in
your hand and that is it.
For every offence, there is a defence, so what methods are available to counter quorum
sensing in financial markets? Translating FED or Presidential speeches into
probability codes for market reaction is easy...different agencies or news
feeds could have double speak, which would essentially be "Quorum
Quenching"...a disruptor causing a breakdown of the internal
communication between components to "sense" that an appropriate
density/concentration has been established. Many new Biotech drugs are being
developed to disrupt quorum sensing of pathogenic bacteria, such as MSRA.
Since, many different companies are
likely to employ some version of quorum sensing, it should not be viewed as
illegal to combat it. Quorum sensing based upon volume analysis is rather
hard to come up with a method of disrupting algorithms, but if they are tied
into market events or news, then having news statements written such that an
either/or situation arises would likely cause computers to not generate an
execution order (buy, sell, go short etc.). It is nearly impossible to combat
software that has quorum sensing, so the only way as an average investor it
to follow the advice of a quarterback... "Go Long".
Tying this into the Contracting
Fibonacci Spiral Cycle I came up with last July, entering at stock market
bottoms and at stock market tops will be important, because the swings of the
market will be huge based upon the nature of positioning we are within the
cycle, coupled to computers sensing when a mid-term top is put in place.
Computers are based upon human emotion, so the best way to fight fire is with
fire. Know the important points for entry and exit and get out before
computer software executes large trades that reverse the general trend.
Software that has neural network capacity with quorum sensing will require
having superior source code as the CFS oscillations really begin to tighten
up...otherwise a company has the ability to go bankrupt in milliseconds going
forward.
We have precise dates for when the
broad stock market tops out, along with precious metals based upon the CFS,
so these points in the future should be respected. There will be significant
volatility going forward, yet there will be order within the chaos.
Application
The first portion of the article was
rather heavy into the theory of Quorum Sensing, but was required to give a
really good feel for how it works and how it is difficult to avoid unless
future time points for market turns are known. This is probably the easiest
way to perform Quorum Quenching...anticipate what computers will do and then
align trades for riding the trend. The following three charts with complete
analysis are based upon Elliott Wave analysis, but have time assignments with
heavy influence from the CFS, full stochastics and
Bollinger bands on daily, weekly and monthly charts.
The short-term Elliott Wave count of
the US Dollar Index is shown below, with the thought pattern forming denoted
in green. Although a top is indicated for early April, action of the past few
weeks suggest it may extend into mid to late April. The move up since September
represents a contracting triangle. This lower Degree wave is part of a larger
triangle pattern that appears to be upside exhaustion pattern. For this
pattern to have credence, the decline must retrace the move to the breakout
point of 73.58 in an equivalent or lesser amount of time that it took to
form...if so, then this pattern has been accurately
depicted. This would put the latest point in time to break beneath 73.58 at 8
months out, or November....I expect this level to be tested no later than
August. A 2-4 month battle between 72-73.5 will ensue, followed by a very
sharp decline to the 64-66 area....this level should be reached no later than
summer 2013.
Figure 1
The mid-term Elliott Wave count of
the US Dollar is shown below, with the thought pattern forming beneath in
green. The US Dollar took 4 months to bottom longer than anticipated last
summer, so mentally shift the pattern over 4 months and it fits rather well.
At present, wave [E] of a triangle forming since 2008 appears to be nearing
completion, with a high degree of correlation in price action for waves [A],
[B], [C] and [D] (a uniform triangle??)...wave [A] was the most violent move
of all, which fits with a triangular classification. At present, the %
retracement of wave [C] was 50%...I was looking for a move to 61.8% but this
given weakness is extremely bearish for the US Dollar over the course of next
10-18 months. Two key important support levels are 73.5 and 72.0...the US
Dollar should have a 2-4 month battle in this range beyond August before
breaking down and trying to establish a bottom. Natural Fib supports lie at
64-66, based upon downside projections for breaking beneath a long-term
triangle. When the US Dollar does bottom in early to mid
2013, it will start to rise as deflation kicks in, which in turn will
promote a liquidation of all tangible assets as loans etc. are called in. A
rise in the US Dollar to the 72 level should occur, which suggests that the
price of gold with the US Dollar at 72.0 is where before breaking down is
approximately where it can be expected to correct to. We are looking for
approximately $3000/ounce gold in early to mid 2013,
with a minimum correction to at least $2200-2400/ounce. We are in a very
choppy environment that will only get choppier going forward...
Figure 2
The long-term Elliott Wave analysis
of the XOI is shown below, with the thought pattern forming denoted in
green...not a perfect fit, but it is following the overall trend. Expect to
see a decline to at least the 1138-1191 area before heading higher...please
note that 1191 is the minimum expected value to be seen before the present
correction is over. I have a top indicated in October, but it more than
likely will extend into late November/early December. Do not forget that high
oil prices will eventually stop the economy...the broad stock market will
sense this 6 months out, so commodity prices could
keep barrelling higher without stock market
participation until June 2013. Please note that the HUI could be the
exception to the rule, given 18 months of sideways price action...a move to
the upside in gold stocks is not expected to occur until mid to late April
due to strength in the US Dollar.
Figure 3
To summarize, "If you can't beat'em, join'em"...it is
impossible to trade against a computer that can literally complete a trade
cascade before one can even click the mouse to execute a personal trade. To
counteract this, make sure that the current market environment is thoroughly
understood and know when the time posts for when market tops and bottoms are
due to arrive on the journey through time. Easier said than done, but this is
the only way the average investor can stand a chance...positioned trading
within defined market trends.
So far, the CFS has aided immensely
at being on the right side of the market since last July...granted the depth
of declines can be hard to predict, but nonetheless, the market has been
following the preset course we are on. CFS is based upon the collective human
psychology and how the markets respond along with social mood at a particular
point in time is related to this. I am certain once the CFS has completed, it
will eventually be accepted and add a new dimension into Socioeconomics, but
for now, is likely to be viewed in disbelief. For anyone who is interested in
learning more about the CFS, simply Google my name alongside Contracting
Fibonacci Spiral and 6 different articles should pop up. If one goes to http://www.safehaven.com/author/21/david-petch
the top 7 articles, starting with 7th down are all the published series on
the Internet.
I am sure there are novel ways of
Quorum Quenching that could disrupt large company software...by trade I am a
scientist in Biotech, so computer programing is a very long stretch from my
formal training...perhaps others with training in this area may post articles
on how quorum quenching strategies. Some of the best applications in some
fields however often have "borrowed" concepts from others.
Have a great day.
David Petch
Treasure
Chests.com
Treasure Chests
is a market timing service specializing in value-based position trading in
the precious metals and equity markets with an orientation geared to
identifying intermediate-term swing trading opportunities. Specific
opportunities are identified utilizing a combination of fundamental,
technical, and inter-market analysis. This style of investing has proven very
successful for wealthy and sophisticated investors, as it reduces risk and
enhances returns when the methodology is applied effectively. Those
interested in discovering more about how the strategies described above can
enhance your wealth should visit our web site at Treasure Chests
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