Preface

A brief overview of cycles and time.... and how we apply both to trading and investing.

Chapter 1

Cycles

The first aspect of our model is ANALYSIS. To understand our philosophy and our focus on both a macro and a micro level, we need to understand the concepts of cycles .

Everything moves in waves and cycles. It is how energy travels. The world is comprised of complex dynamic cyclical structures, and these complex relationships are dynamic. Nothing can be singled out to one cause and effect when trying to understand what causes certain events to unfold over time. However, underneath all the complexity, there in lies recognizable cycles and patterns. As it pertains to price we find these same cycles and repeatable patterns to be fractal in nature, existing on all time frames.

There are many different types of cycles, there are time and calendar cycles, cycles in physics, organic cycles, planetary cycles, social cycles, business cycles, spiritual cycles, war cycles, agriculture cycles, life itself is a cycle from birth to death. As it relates to trading and investing, we focus on the global business cycle and the individual price cycles that emerge within different markets as well as individual price patterns of a particular security or asset.

Let’s start on a global macro level first to understand the overall global business cycle. Unfortunately even today, the concept of a business cycle and the cyclical nature of the global economy has been lost in a centrally planned Keynesian/Marxist thought process that has only slowed our growth prospects and obstructed our recovery while ensuring the next down turn will be even worse then the prior.

We need to re-examine and understand the truth, and that is there is a global business cycle that has always existed throughout history and it will continue to exist because the passions of men never change and the cycles of nature will always remain.

The individual who has done the most research and who has invested the most amount of resources on this topic of the business cycle is Martin Armstrong. Martin is a trader and economist who founded Princeton Economics International. His firm advised clients and governments across the globe with assets under contract at one time of over $3 trillion. Martin has this to say about the business cycle:

“There are those that adamantly deny the existence of a Business Cycle for one simple reason; if a regular Business

Section 1

The Business Cycle

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Cycle exists, then man and his government, driven by special interests, are incapable of manipulating its outcome. The entire foundation of Marxism was the recognition of the Business Cycle and the idea that it could be eliminated by confiscating all the wealth of the people. Even John Maynard Keynes (1883–1946) followed this basic tenet of Karl Marx (1818–1883) and assumed that government had a role it could play in preventing the Business Cycle from rising and falling. Yet in the midst of such adversity, what these ideas ignored is that man learns from his mistakes, as an individual as well as a group. It has been through the Business Cycle that all advancement and thus economic evolution emerges. Joseph Schumpeter (1883–1950) called these Business Cycle events – Waves of Creative Destruction. Unless oil rises in price to excessively high price levels, alternative fuels will never be developed. There must be a viable economic foundation to open the door to whatever new alternative might exist. This becomes the economic evolution within society.

This assumption that man is even capable of altering the Business Cycle at will is the delusion of demigods. Paul Volcker, former Chairman of the Federal Reserve, expressed in his 1979 Rediscovery of the Business Cycle:

“Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the

conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment. … By the early 1970s, the persistence of inflationary pressures, even in the face of mild recession, began to flash some danger signals; the responses of the economy to the twisting of the dials of monetary and fiscal policy no longer seemed quite so predictable. But it was not until the events of 1974 and 1975, when a recession sprung on an unsuspecting world with an intensity unmatched in the post-World War II period, that the lessons of the ‘New Economics’ were seriously challenged.”

Even Chairman of the Federal Reserve Arthur Burns (1904-1987) shared the same view. Government with all its power and endorsement of John Maynard Keynes (1883-1946) who argued

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that the economy can be managed to eliminate the Business Cycle, has been unable to prevent recessions and economic booms.

Indeed, the Business Cycle is as regular as the four seasons for even weather is incorporated within it. As weather has fluctuated according to a 300-year cycle in the energy output of the sun, mankind has been driven hither and yon in search of better weather and food supply. Thus, migration throughout the world has also been a byproduct of the Business Cycle.

The Economic Confidence Model (ECM) is a refined theory of the Business Cycle by Martin Armstrong and his firm Princeton Economics. The Business Cycle has been observed by many over the centuries and the driving mechanism is indeed complex, but it certainly incorporates many aspects from the repetitive forces of nature as in the changing seasons and the repetitive forces driven by the passions of man.

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Everything is incorporated within the Business Cycle from weather to politics. Nothing moves in a straight line. Even your heart beats in a cycle. Nothing is free of a cycle as long as it lives, life itself is a cycle.

When Marty discovered the ECM he did not begin with a predetermined theory of cycles but rather discovered it when doing research and studying the international economic panics throughout history. Much of the following that is written here regarding cycles is from Martin's work and his company's research reports (Princeton Economics Research Institute) . Martin began to notice a pattern emerging from these key financial panics. He took a period of 224 years from 1683 to 1907 and divided the number of panics in the list being 26 and came up with the number 8.6153846615. Later this calculation

would prove to be a very important discovery. Taking this idea of a business cycle, Martin began testing the 8.6 year interval.

Having experience with electrical engineering, Martin realized that light

traveled in a wave formations with two components - electric and magnetic fields. The magnetic filed provides the outer-boundary limits at either side of the center line or mean within which the electric field travels.

He then looked for a similar structure within the economy assuming that the design of nature was uniform and did not just

apply to physics but to the business cycle as well. He then discovered the 2nd component which is similar to the magnetic field in economic terms, which is VOLATILITY. Now the business cycle was beginning to take shape.

Martin then found that the 8.6 year frequency built up in intensity forming longer-term waves of 51.6 years. The principle of volatility meant that there had to be 2 opposite attractors of equal force,

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like a pendulum swinging from one extreme to the other. All things posses these opposing forces - like good and evil - male and female. Cycles exist because this is the core of existence it is the divine structure of the universe whereby energy travels from one place to another. Everything cycles from subatomic particles to

the planetary cycles, right down to the cycle of life itself from birth through adulthood to eventually death. What he discovered was that it was impossible to remove nature from the business cycle since nature was a large part of its fundamental structure driven by weather, natural disasters, plague, periods of plenty

and periods of famine. Even the Biblical account of Joseph tells of this cyclical nature where Joseph interpreted Pharaoh’s dream of 7 years of plenty followed by 7 years of drought.

What Martin discovered next embedded in this 8.6 year frequency may have been an even greater revelation of the true hidden order within the seemingly chaotic structure of the global economy.

Martin discovered that by simply dividing 224 years by the number of panics being 26, produced 8.6153846615, his presumptions was that this was simply an average and not precise but when the calculation and frequency began working to

the VERY DAY, he was stunned. Further investigation led him to the next great discovery that this number was actually a derivative of Pi - 3.14159265359. The number of days within the 8.6 year frequency was 3,141 days, take Pi multiplied by 1,000, you arrive at this number - it was the perfect cycle. The mathematical order is astonishing. If he took half the number of events , 13, and divided that into 8, the resulting calculation produced the same decimal of the 8.6 calculation - .6153846615. There are other hidden regularities that emerged such as the method of reducing and adding every digit irrespective of the decimal and subtracting 1 returned Martin to the same spot (86153846615=53-1=52, twice the unit of 26). Not only is 8.6 years equal to the perfect number of Pi *1,000 days, what also emerged was 8.6 times 3 is 25.8 with the Precession of the equinox being 25,800 days.

The cycle that Martin stumbled upon was the perfect cycle of pi that reveals the hidden order behind all things. The 8.6 year cycle

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builds into six waves of 51.6 years which also then builds into six waves forming 309.6 years.

What Martin discovered some have dubbed the "Secret Cycle" the sheer accuracy of the cycle so many times to the precise day has proven a whole new world exists and a new understanding of TIME must be explored. The existence of this cycle proves the hidden order behind everything and that there is a divine code upon which everything is constructed. There truly is a grand design within this complex seemingly chaotic existence.

By understanding the principals of cycles at work within everything on both a grand and minuscule scale, we arrive at the importance of this cyclical structure in trading and price movements.

Just like energy moving through a medium like water in physics, energy too moves through the markets and these cyclical structures exist in price and reveal themselves to us in the charts.

To further understand how cycles and patterns exist throughout all different time frames, we need to realize the fractal design of nature and how it extends into absolutely everything.

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Chapter 2

The Fractal Nature of Trading

This truth about how the world is designed and how price movements repeat in a fractal nature across all time frames is the key to understanding why our trading model works so well across multiple time horizons and across all markets.

The above picture is a graphic detail of what is called the Mandelbrot Set. Mandelbrot set images are made by sampling complex numbers and determining for each whether the result tends towards infinity when a particular mathematical operation is iterated on it.The set is closely related to Julia sets (which include similarly complex shapes) and is named after the mathematician Benoit Mandelbrot, who studied and popularized it. Images of the Mandelbrot set display an elaborate boundary that reveals progressively ever-finer recursive detail at increasing magnifications. The "style" of this repeating detail depends on the region of the set being examined. The set's boundary also incorporates smaller versions of the main shape, so the fractal property of self-similarity applies to the entire set, and not just to its parts.

The Mandelbrot set has become popular outside mathematics both for its aesthetic appeal and as an example of a complex structure arising from the application of simple rules, and is one of the best-known examples of mathematical visualization.

The Mandelbrot set has its place in Complex Dynamics, a field first investigated by the French mathematicians Pierre Fatou and

Gaston Julia at the beginning of the 20th century. Complex dynamics is the study of dynamical systems defined by iteration of functions on complex number spaces. A dynamical system is a concept in mathematics where a fixed rule describes the time dependence of a point in a geometrical space. Examples include the mathematical models that describe the swinging of a clock pendulum, the flow of water in a pipe, and the number of fish each springtime in a lake. Dynamical Systems theory deals with

Section 1

Complex Dynamics

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the long-term qualitative behavior of dynamical systems, and studies the solutions of the equations of motion. These systems are primarily mechanical in nature; although they include both

planetary orbits as well as the behavior of electronic circuits and the solutions to partial differential equations that arise in biology. Much of modern research is focused on the study of chaotic systems.

The Lorenz system is a system of ordinary differential equations (the Lorenz equations) first studied by Edward Lorenz. It is notable for having chaotic solutions for certain parameter values and initial conditions. In particular, the Lorenz attractor is a set of chaotic solutions of the Lorenz system which, when plotted, resemble a butterfly or figure eight.

At any given time a dynamical system has a state given by a set of real numbers (a vector) that can be represented by a point in an appropriate state space (a geometrical manifold). Small changes in the state of the system create small changes in the numbers. The evolution rule of the dynamical system is a fixed rule that

describes what future states follow from the current state. The rule is deterministic; in other words, for a given time interval only one future state follows from the current state.

The concept of a dynamical system has its origins in Newtonian mechanics. There, as in other natural sciences and engineering disciplines, the evolution rule of dynamical systems is an implicit relation that gives the state of the system for only a short time into the future. (The relation is either a differential equation, difference equation or other time scale.) To determine the state for all future times requires iterating the relation many times—each advancing time a small step. The iteration procedure is referred to as solving the system or integrating the system. Once the system can be solved, given an initial point it is possible to determine all its future positions, a collection of points known as a trajectory or orbit.

In mathematical physics, equations of motion are equations that describe the behavior of a physical system in terms of its motion as a function of time. More specifically, the equations of motion describe the behavior of a

11The Lorenz attractor arises in the study of the Lorenz

Oscillator, a dynamical system.

physical system as a set of mathematical functions in terms of dynamic variables: normally spatial coordinates and time are used, but others are also possible, such as momentum components and time.

There are two main descriptions of motion: dynamics and kinematics. Dynamics is general, since momenta, forces

and energy of the particles are taken into account. In this instance, sometimes the term refers to the differential equations that the system satisfies (e.g., Newton's second law or Euler–Lagrange equations), and sometimes to the solutions to those equations..

here p = p(t) is the momentum of the particle and F = F(t) is the resultant external force acting on the particle (not any force the particle exerts) - in each case at time t. The law is also written more famously as:

However, kinematics is simpler as it concerns only spatial and time-related variables. In circumstances of constant acceleration, these simpler equations of motion are usually referred to as the "SUVAT" equations, arising from the definitions of kinematic quantities: displacement (S), initial velocity (U), final velocity (V), acceleration (A), and time (T).

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Velocity

Kinematic quantities

Interactive 1.0 Kinematic Quantities

Equations of motion can therefore be grouped under these main classifiers of motion. In all cases, the main types of motion are translations, rotations, oscillations, or any combinations of these.

Historically, equations of motion initiated in classical mechanics and the extension to celestial mechanics, we use to describe the motion of massive objects. Later they appeared in electrodynamics, when describing the motion of charged particles in electric and magnetic fields. With the advent of general relativity, the classical equations of motion became modified. In all these cases the differential equations were in terms of a function describing the particle's trajectory in terms of space and

time coordinates, as influenced by forces or energy transformations.

However, the equations of quantum mechanics can also be considered equations of motion, since they are differential equations of the wave-function, which describes how a quantum state behaves analogously using the space and time coordinates of the particles. There are analogs of equations of motion in other areas of physics, notably waves.

The markets at their core move in waves, just like in physics. Wave motions transfer energy from one point to another, often with no permanent displacement of the particles of the medium. A wave is disturbance or oscillation that travels through matter or space, accompanied by a transfer of energy. Waves are described by a wave equation which sets out how the disturbance proceeds over time. The mathematical form of this

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Movie 1.0 Coupled Oscillators

equation varies depending on the type of wave. A wave can be transverse or longitudinal depending on the directions of its oscillation.

Sound waves are examples of longitudinal waves...

Trending markets most resemble transverse waves oscillating perpendicular (or right angled) to the direction of energy transfer. When markets settle into sideways range trades or consolidation periods, the wave structure more so resembles that of longitudinal waves (like sound waves as previously mentioned).

There is a complex dynamic structure that is inherit in nature and it is these dynamical systems that provide the solutions to the questions of motion. It was our goal to draw similar conclusions about the price movements in the markets and then design a trading system defining the risk around the probable outcomes of these similar patterns of motion. But in doing so we further discovered the fractal nature of time and how this phenomena needed to be applied to the markets across multiple investing or trading time frames. Again to understand the fractal nature of trading, we need only look to the fractal self-referring processes in nature.

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There is at the core a system of self-referral in nature and throughout the universe.

The word FRACTALS comes from the Latin frāctus meaning "broken" or "fractured", and it is used to extend the concept of theoretical fractional dimensions to geometric patterns in nature. We see these patterns in the inherent design of the universe and they are often found in a self-referring symmetrical structure. All living organisms are designed based on their DNA. This DNA coding provides instructions for development, and it is this system of development that is self-referring whereby two parents contribute their DNA to the offspring that combines the two strands and the result is a composite based upon the parents. In other words, the offspring are similar to their parents because of

this self-referral process. This lies at the core of everything - a structural design of self-similarity so that the net generation uses the code of the previous. We see examples of this same self-referral throughout nature. The non-aggregated snowflake often exhibits six-fold radial

symmetry. The design of the Koch snowflake is a fractal that begins with an equilateral triangle and then replaces the middle third of every line segment with a pair of line segments that form an equilateral replication. The design of a fern is another example. The individual leafs reflect the overall design of the tree itself with a trunk and branches that emerge from the sides. This is fractal so that you can look at the leaf and still see the same pattern forming the tree. This is the fractal nature of everything around us. It is the same structural design being replicated from one level to the next. The economy and the markets have this same self-referring fractal nature. We can see constant patterns being replicated from one level of time to the next.

Here are just a few examples of the same repeatable price trends on the charts. Notice how we have the same pattern on completely different time frames. We find the same patterns

Section 2

The Fractal Design of Nature

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unfolding again and again on any time horizon, and it does not matter the security or asset. Its all energy and it moves in the same similar self-referring manner.

Here’s a bottoming tail of the Swiss (USDCHF) on the weekly chart back in 2011...notice how the bottoming tail and price action occurs well below the 200 period moving and the tail is the last exhaustion move forming the bottom with a rally of the lows to follow.

Here is another example on EURCHF same looking bottoming tail formation deep below the 200 period moving average (the red line). We can see its almost the same pattern, its a very distinctive “V” bottom formation. This truth about how the world is designed and how price movements repeat in a fractal nature across all time frames is the key to understanding why our trading model works so well across multiple time durations.

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Chapter 3

TimeTime is a dimension that we divide up to mark its passing. Most of our thinking in the west and in economics is linear and is not cyclical or dynamic. This has been one of our greatest failures in education and finance. We must understand that Time is but a cycle.

Most of old Wall St. still believe that trading and investing is all about the fundamentals or “valuation”, however these two categories should only make up 20% (if that) of your trading and investment process. The smaller your time frame actually the less fundamentals you should use and really a day trade or micro approach has zero to do with fundamentals. The reason being its all about TIME.

The price action over the next 15 minutes in a market has nothing to do with the fundamentals and has everything to do with the energy and momentum in the market in that moment or in that point in TIME. What is driving each tick on the small timeframe is the balance of energy or power. Who’s the more willing buyer or seller?. Who are the major players at that moment in time that are flooding the market with buy orders or sell orders? Who is the panicked sellers in the moment? Who is backing off the bid or maybe there is no bid? This is the activity and emotion of the small timeframe, and even in the 1 minute chart there still is a flow or cyclical motion that moves through the market. It is not about the fundamentals of a week or month from now on the small timeframe. It is certainly true that news

and a variety of catalysts intraday - from economic numbers to central bank speakers - no doubt these events can be a source of knee jerk market reactions and wide volatile swings in price action. However from a TIMING perspective, on the smallest of timeframes, the fundamental factors have no bearing on sound proper micro market play.

Also for the longer timeframes, the fundamentals should not be your main driver of your market decisions and action. And here is why. Any individual or organization will never have all the facts for what it is they wish to make a decision about. Whether that be a management strategy or an investment decision. For example the insiders of a company can know all there is about their particular business and the industry, but it is impossible to know all the external factors that influence that company such as competitors and suppliers. How can a company possibly know what its competitors are doing or not doing? What if company xyz just did a deal that essentially takes you out of the bidding or removes you from your competitive advantage? How can a business possibly know what affect the weather will have on its supply chain? How does the Orange Juice manufacture know

Section 1

The 4th Dimension ....TIME

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ahead of time there is a tree-killing disease on its way from Asia being spread by a specific bug migration? It’s impossible.

You will never have all the facts. This alone makes trading and investing solely on the “fundamentals” a fools game. Even if you had all the fundamentals (which is a fallacy), this doesn’t mean the market will move to that desired or correct fundamental valuation. The markets move in ANTICIPATION of what they perceive. And that perception, whether it accurately reflects what is true or false, is irrelevant because the market will move in anticipation of what it believes is true not what is actually true. For example, a stock can collapse in anticipation of a company going bankrupt even if the final outcome is not bankruptcy. The company may indeed survive and not file bankruptcy or perhaps the truth is that the company really is solvent. It doesn't matter what the truth is during this period of time, it only matters what the market believes is the truth. The market could price in

80%-90% loss in the value of the equity in that company just in anticipation of a possible bankruptcy. Also by the time the news hits of the possible bankruptcy the stock will have already made its move lower and the news of such bankruptcy more often then not will then be the low. That is where the “Buy the Rumor - Sell the News” adage comes from, the markets move in anticipation of reality and often times what “should be” never even materializes. In other words, that price action and the movement that ends up happening in the markets often times never reflects the reality of the situation or the actual truth of the matter. Its all anticipation and perception of a possible future outcome, it’s a CONFIDENCE game.

One more problem with focusing on just fundamentals is that you ignore another market force, and that is POSITIONING. Not only does perception, psychology, emotions, and confidence of the market participants matter; but the positions of these market players matters tremendously. If the crowd correctly perceives that the market is tremendously overvalued and expensive relative to another investment or similar markets, this may be true of the underlying asset or market but this alone does not mean a counter move in the opposite direction is possible. Often times a crowded trade can move quickly in the opposite direction of the perceived market outcome. For example it may be accurate that there is a vast shortage of Wheat in the grains market due to say a severe drought, however if the majority of market players are already long from already high levels anticipating more upside

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with the shortage in supply, it doesn't take much just a small move lower in the price for the majority to begin to feel pain from being long from bad levels. This selling after the majority are already long, leaves little to no more fresh buyers. The smallest amount of selling can force weak longs to sell and incrementally more selling that creates a snowball with a mad dash for the exit. This would be a clear example of how positioning impacts the market price more so then the actual fundamentals of supply and demand.

And lastly we need to understand where TIME comes into play as well vs fundamentals. It does no good for an investor to tie all up his or her capital in an investment that goes nowhere and is dormant for years or decades waiting for the market to price that investment or security in-line with the fundamentals. Just because you think something should be worth a particular price you could be right fundamentally speaking but it is a waste of time and capital if the market doesn't view it as the right TIME for the particular price to come in-line with the fundamentals. The simplest way to put this is, God himself can come down and tell you what the price of Oil should be based on the true fundamentals or intrinsic value of that commodity in that region etc. And lets say oil is trading at $100 a barrel, God tells you it WILL be $30 that is where oil should trade. What is your next market action, what do you do? Do you sell short oil? What if the price of oil then goes sideways first for 2 years between $100 and $110, and then sky rockets to $150 in 2-3 months only then to

collapse over the following year back down to the $30 level? You have to ask WHEN will oil be $30. It does no good to tie up capital you could be using for an investment that is working for you and producing returns NOW. Not only that but if the market moves to $150 first you and everyone else will be stopped out and then most likely you will not have the courage to re-short and you will miss the final collapse to your initial target. So in that scenario you were right about the eventual $30 level but your timing was wrong. This is why TIMING matters above all else.

So the next question then becomes how do we build a model and learn to trade/invest around TIMING? This is what our model and process is all about - not just price but TIME.

Timing the markets and cycles go hand in hand, its important to use both and to understand the relationship. Long-term bear markets tend to last in time units of 2-3 years while bull markets tend to last in units of 5-8. The reason bear markets have a shorter duration is the nature of human emotion. It takes humans much more time to gain confidence while it takes much less for

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us to loose confidence in someone or something. Fear is a stronger emotion then greed. The cyclical units of time break down in derivatives of Pi we already touched on this in Chapter 1 but again 1.075 units of time build into 2.15 units that make up the 8.6 unit frequency that builds into the 51.6 and 309.6 wave. Again the number of days in 8.6 years is 3,141 days (Pi x 1,000), 8.6 times 3 is 25.8 with the Precession of the Equinox being 25,800 days. There are 13 and 19 period cycles, take 8/13 and we get the decimal of the 8.6 year frequency .61538462.

Fibonacci plays a role in timing as well. Leonardo Bonacci (c. 1170 – c. 1250—known as Fibonacci was an Italian mathematician who greatly influenced western mathematics

during the middle ages and is credited with introducing the Hindu-Arabic numerical system to Europe.

This method allowed calculation that was not taught in schools and was unknown in Christian circles. Fibonacci’s “Liber Abaci” introduced vital concepts that enable banking to emerge.

He described the idea of a place value, whereas the position of a figure determined where it is a unit, such as 10, 100, 1000 and so on. Fibonacci is probably best known for his sequence derived from a pair of multiplying rabbits (1, I, 2, 3, 5, 8, 13, 21, 34, 55 .•. ) where the progression follows what has become known as the “golden ratio” 1.6180 .

Some of the greatest mathematical minds of all ages, from Pythagoras and Euclid in ancient Greece, through the medieval Italian mathematician Leonardo of Pisa and the Renaissance astronomer Johannes Kepler, have spent endless hours over this simple ratio and its properties. But the fascination with the Golden Ratio is not confined just to mathematicians. Biologists, artists, musicians, historians, architects, and psychologists have pondered and debated the basis of its omnipresence and appeal. In fact, it is probably fair to say that the Golden Ratio has inspired thinkers of all disciplines like no other number in the history of mathematics. We can see that clearly there is a hidden design to

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the universe and these ratios play out in the geometry of time in the markets as well.

We will have more on these topics on our website going forward with products and courses designed to go more in depth on the above mentioned topics. We will also be constantly adding content and putting out updates on our blog regarding current events and what the current global trends are that are moving world markets.

If you like this information here in this eBook and you’d like more great training on markets, cycles, technicals, and how to add a real edge to your trading and investing email my partner at Ritas@jenkinsrm.com or visit our website at http://www.jenkinsrm.com

We look forward to hearing from you,

-- Jason Jenkins

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