The Entropy Danger We continue to review Entropy Tops and Bottoms in our newsletters. Over the past 27 years, we have found the analysis of Entropy Tops and Bottoms a terrific addition to the buy and sell points of cyclic analysis. No more valuable or accurate technical analysis tool exists.
Our Entropy work comes from a tangential application of The Second Law of Thermodynamics. This law basically says that, in the end, all things come to rest. When applied to humans, Entropy equals death.
When applied to the stock or commodities markets, it means the end of one move and the reversal to the other direction. If the current direction is up, it shows the end of the upmove and the reversal to the downside. If the current move is down, it shows the end of the downmove and the reversal to the upside.
As we read our charts and discover Entropy Tops and Bottoms, we find the rules apply equally to charts of stocks or commodities. The rules apply equally to charts of any time period — daily, weekly or monthly. The rules apply equally to Dow Jones Industrial stocks and gold mining company stocks. The rules apply equally to Standard & Poor Futures and to Gold or Silver Futures.
Entropy rules as we now apply them are correct over 90% of the time. No other Technical Analysis tool comes close.
This week we are fortunate to have a weekly chart that exemplifies the basic rules and also shows a couple of the finer Entropy points as well. Over the years our work has shown us two basic time elements. They are: 1.) Moves up or down at the rate of 80 to 85 degrees, normally last 6 to 9 units of time. 2.) Moves up or down at the rate of 85 to 90 degrees, normally last 3 to 6 time units.
On a daily chart, time units are calendar days, not trading days. Entropy moves are a minimum of three days. The first unit of any Entropy move counts as day one.
Entropy moves are basically moves up or down at a rate of change of 80 plus degrees. Entropy moves are exhaustion moves and signal the end of the effort required to make the move to begin with.
Entropy moves end when the price move of a certain day goes above or below the extreme of the prior day. If a current move is up, the Entropy Top is in place when price action goes below the low of the prior day. If a current move is down, the Entropy Bottom is in place when price action goes above the high of the prior day.
The chart we use today to show examples of Entropy is the S&P Futures chart – weekly time period.
The first Entropy move to the upside begins the week of 6-19. It is a rise of 87 degrees and lasts 5 weeks. It ends the week of 7-24 when price action that week goes below the low of the prior week.
The week of 7-24 begins an Entropy move to the downside. This move lasts 4 weeks at a rate of decline of 88 degrees. It ends when price action the week of 9-18 goes above the high of the prior week. In this instance the downmove doesn't end, as there is a two week extension. However both the Entropy upmove and Entropy downmove result in profitable trades.
The next upmove begins the week of 10-09. This rise lasts an abnormal 8 weeks long. This rise is truly stupendous at the rate of 87.39 degrees. Remember this is an index of 500 stocks. Some stocks in the index are rising at even higher rates of climb.
The Entropy Top is now in place as price action last week went below the low of the prior week.
BUNGEE JUMPERS — READ ON
So far we've covered the basic points that we make in our two weekly newsletters. Here are the additional finer points we want to point out now.
There are times when, especially in rises, we say, "Watch Out – after rises like this, the decline on the other side can be as fast if not faster than the rise that brought us to this Entropy Top."
Now you look at this S & P Futures chart and your reaction may be, "Marantette – No Way!" Well, stay with us. Look back at the 06-19 rise. It took 5 weeks to go from 1074.67 to 1188.04. It took 4 weeks to fall from 1188.04 to 1054.00.
5 weeks up +113.37 points
4 weeks down –134.04 points
Markets go down faster than they go up.
Now look at last week's price action on the chart again. Is this market now starting down faster than it went up? Looks like it! Time and time again our Entropy analysis shows that after an Entropy rise, the stock or commodity can decline at a rate faster than the previous rise.
This is why our long-term stock market investors are now 100% in cash. This is why our DowStock mid-term portfolio is 90% short.
Other work of ours also shows that over the past 30 years, when the stock market declines, gold stocks decline faster and longer then the general market. In our Goldstock Trading Portfolio, which by the way is +62.48% year to date, we are now 100% in cash.
Unless you are truly a gunslinger, this is no time to be in the stock market.
David T. Marantette III
Goldstock Newsletter
http://www.goldstock.com
16 December 1998
