Forecasting Markets by Looking at Chart Patterns

The word “fractal” often means different things to the lay public compared to mathematicians. The public tends to think of fractal art while mathematicians think of the formula that actually generates the art.

The mathematical concept is difficult to define formally, even for mathematicians, but the key feature of a fractal is that if you “zoom in” nothing changes, the same pattern just repeats over and over. The interesting thing is that fractals appear quite frequently in nature. From things as small as DNA, to Snowflakes and Crystals, to Pineapples,  Ocean waves and Mountain Ranges, fractals are everywhere.

Interestingly, they are also present in the stock market as we look at Minute Charts, compared to Hourly, Daily, Weekly, Monthly, etc.~ Tim McMahon, editor

Two Illustrations of the Fractal Form of Financial Markets

By Elliott Wave International

Nature is full of fractals.

Fractals are self-similar forms that show up repeatedly. Consider branching fractals such as blood vessels or trees: a small tree branch looks like an approximate replica of a big branch, and the big branch looks similar in form to the entire tree.

Fractals also form in the price charts of financial markets, at all degrees of trend, in both up- and downtrends. In fact, without knowing the time or price labels, you can’t tell if you’re looking at a 2-minute chart, a daily chart — or a yearly one.

Fans of Elliott wave analysis have been using this information to their advantage for decades. Our March 2020 Elliott Wave Theorist gave subscribers two important real-time examples of fractals at work. Here’s the first one along with the commentary:

This figure offers a good illustration of the fractal nature of markets. It shows the correction in T-bond futures of 2016-2018 on a weekly chart against the correction in the last four months of 2019 on a daily chart. They look quite similar, and each one led to a run to new highs.

And here’s the next example, along with commentary from the March Theorist:

This figure shows another example of the market’s adherence to forms. The top graph shows the 10-minute range for the S&P futures contract on March 4, and the bottom graph shows the same for March 5. Don’t they look similar?

In fact, however, the trend of the market in the top graph was up, and the trend shown beneath it was down. We simply inverted the bottom graph for our illustration. Prices rose on March 4, and they fell on March 5, in the same pattern.

Here’s what this means for investors and traders: The fact that price charts unfold in repetitive and recognizable patterns makes financial markets predictable.

As Elliott Wave Principle: Key to Market Behavior by Frost & Prechter noted:

Scientific discoveries have established that self-similar pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo “punctuated growth,” that is, periods of growth alternating with phases of non-growth or decline, building into similar patterns of increasing size.

Learn more about these self-similar pattern formations and how they can help you to anticipate turns in widely traded financial markets, including the stock market.

You can do so by reading the online version of Elliott Wave Principle: Key to Market Behavior, 100% free.

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