The Non-linearity of Market Trends, and Space Programs

Linear projections will often take you down the wrong path

By Elliott Wave International

Let’s begin with the old paradox: “The only constant is change.” This is the main reason why projecting present conditions into the financial future so often fails.

If someone had asked you in 1972 to project the future of China, would anyone have said, in a single generation, they will be more productive than the United States and be a highly capitalist country?

Project the U.S. space program in 1969, in fact many people did — there are plenty of papers you can read from 1969 to 1970 saying, well, it’s obvious that, at this pace, we’ll both have colonies on the moon very soon, and we’ll have men on Mars…

One could just as well ask someone to project, say, the Roman stock market in 100 A.D. I doubt if you’d have found anyone who said, well, it’s essentially going to go to zero.

— Robert Prechter in a speech given at the London School of Economics, (2009)

“Toward a New Science of Social Prediction”

The Problem with Linear Thinking

Linear thinking can be detected in our common experiences as well. For example, what do you make of the socially awkward classmate in high school who grows up to be a successful business owner? Or the former class president who was voted most likely to succeed but now struggles to get by in adulthood? Projections for each of their futures were probably just the opposite of how their lives turned out.

In an article some years ago, my EWI colleague Robert Folsom addressed the flaws of linear thinking when he wrote about rogue waves, which a BBC report described this way:

“Freak waves are the stuff of legend. They aren’t just rare; according to traditional views of the sea, they shouldn’t exist at all. Oceanographers and meteorologists have long used a mathematical system called the linear model to predict wave height. This assumes that waves vary in a regular way around the average (so-called significant) wave height. In a storm sea with a significant wave height of 12m, the model suggests there will hardly ever be a wave higher than 15m. One of 30m could indeed happen — but only once in ten thousand years.”

Folsom then went on to explain that, in 2006, the European Space Agency had used a satellite to take thousands of photos of the ocean’s surface during a three-week period. It recorded 10 giant rogue waves, each at least 82 feet high.

So much for the idea that towering rogue waves could happen only once in 10,000 years.

Unexpected nonlinear occurrences can also unfold in the stock market.

Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today’s trends linearly into the future. Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress.

— Elliott Wave Principle, (p. 94)

What is the magnitude of the next market  period likely to be? You may be astonished to find out, if you’ve been thinking linearly up until now. It’s time to start thinking differently from the herd and you can start doing just that with some help from a free resource from Elliott Wave International. See below for full details.

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