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Special Report: The 64-month Parabolic Growth Pattern
By David Nichols
dnichols@fractalpublishing.com
Over the past month I have been doing intensive research into the way parabolic growth patterns grow and develop in financial markets.
Originally my plan was to go back and look at the most famous "bubbles" in financial history to look for similarities to the current pattern in gold. In my experience most market fractal patterns are similar -- particularly parabolic growth patterns -- so I assumed I would indeed find some tendencies in past bubbles that I could then apply to the current growth pattern in gold, to help give us some idea about how such a pattern would typically develop.
But once I started to dig deeper I was absolutely stunned at what I was seeing.
To categorize these parabolic bubble patterns as similar would be a wild understatement. These patterns are so alike that it is amazing -- you might even say downright spooky.
And I chose this word -- "spooky" -- purposefully, as when I was first comparing these bubble patterns I got that involuntary tingly goose-bump reaction that comes from a sudden and unexpected glimpse of something much bigger and more profound than our conscious minds are able to grasp and understand.
It's sort of the same way that an awesome musical performance triggers an involuntary emotional reaction -- often also with goose-bumps -- as that musical moment gives you a glimpse of something profound, and something deeper than our abilities to consciously understand.
I am not a particularly religious person, at least in an organized "go-to-church" sort of way, but I have to admit that the further I get on my journey to discover the market's mysteries, the more I start to understand the importance of the spiritual side of human nature, and why it is an important part of every single culture and civilization on planet earth.
I also strongly believe that our intelligence as humans in comparison to the scale of the universe, and that it is ridiculous to think that our minds have evolved and developed to the point where we can understand how the natural world really works. The idea of us understanding the cosmos is about as ludicrous as the idea that an ant could read and appreciate Shakespeare's King Lear.
On a cosmic level, we are the ants. And this analogy is appropriate for markets in that we humans also follow behavior patterns that create predictable structures, just as ants following individual instinctive behaviors are able to create incredibly complex and architecturally brilliant colonies.
Over the past month I've spent a lot of time trying to better understand why these growth patterns are so consistent and repeatable, and I've come to the conclusion that it has to do with the fundamental way that things grow and develop in the natural world. Nature has a blueprint for growth, and the way that energy is added into an expanding system follows universal principles of propagation and growth.
Financial markets are no different than any other natural system. They also follow these same universal principles of energy flow, propagation, and growth, and this is why there are consistent and repeatable patterns in financial markets.
And the most amazing of all financial market patterns is the parabolic "bubble" pattern.
The most astonishing similarity that I have so far found between bubble patterns is they take 64 months to play out. The lead-in periods can differ in length, but these preparatory periods are also organized along highly similar lines.
But this is the truly amazing thing is this: from the time a market goes into a steeper growth curve -- what I call"hyper-drive"-- until it hits the final peak takes 64 months, with only minor variation.
In a moment I'll show you just how this looks on numerous bubble patterns, and I have no doubt that you will also be amazed. It is one of those things that is so obvious in retrospect, and makes you wonder why you didn't see it all along.
But before we look back at these famous bubble patterns, I want to point out the tantalizing fact that gold looks to be right on the verge of launching into the best part of this pattern, where prices go ballistic to the upside.
If we play this last phase of the pattern in gold correctly -- both on the way up, and then on the way down -- it will quite literally be a "life-changer" for those who have the courage to act.
Think of it this way: What if you knew the precise blueprint of the internet bubble well ahead of time -- say, back in 1997 -- many months before the final blow-off phase? And then what if you also knew precisely when to take those giant profits and throw them on to the short side? What would your life be like if you have played that perfectly, both up and down?
I think we're going to get the exact same chance now with gold, and this time we can get it just right.
But I also have to warn that we don't want to get too far ahead of ourselves with dreams of life-changing riches, as there is still a bit more work to do before we can be certain that gold is indeed moving into this "hyper-drive" phase of its parabolic growth pattern.
But the signs look very, very good.
So let's go back and look at the most famous parabolic growth patterns -- or "bubbles" -- in financial history. We'll look specifically at these patterns:
• Dow Industrials in the 1920s
• Nikkei in the 1980s
• Nasdaq 100 in the 1990s
• the recent bubble in crude oil
• the recent housing bubble, using the stock of luxury home builder Toll Brothers (TOL) as a proxy for this market
There are other bubble markets we could also look at -- and this same typical 64-month growth pattern is there in all of them -- but these should be enough examples to give us a great idea about what to expect in gold.
We'll start by looking at two of the most recent bubbles, in housing and crude oil.
Below is a monthly chart of the growth pattern in Toll Brothers (TOL), which is a perfect representative stock for the bubble in housing and luxury homebuilding from 2000 to 2005. All of the charts I show in this report are monthly charts, and the numbers that you see on the charts reflects where the pattern is along this 1 to 64 month time-frame.
The first thing to notice on this chart is how the first "sprout" came precisely 65 months before the blow-off peak. As I mentioned earlier, there is slight variance in each pattern, as many of the blow-off tops come precisely at month 64 -- some come at month 63, and others at month 65. I think this actually has to do with the way the calendar aligns with the actual number of trading days in the pattern -- but that research is a little too deep for the purposes of this report. We just need to know that the top always arrives right around the 64th month after the initial growth spurt.
Also notice how the final third of the pattern -- after month 42, and then month 56 -- was where the pattern went absolutely ballistic to the upside. This is highly typical of parabolic patterns, as invariably the largest gains come during the last stage of the pattern.
This is a very important point to keep in mind, as gold could be approaching just such an acceleration point into a similar ballistic phase. I'll talk more about this later, after we've seen a few more patterns.
The growth pattern in crude oil from 2003 to 2008 is almost identical to the homebuilding bubble, which suggests that these bubbles were fundamentally driven by the same thing -- namely, the loss of purchasing power in the dollar over this time period.
I don't want to veer off topic too much, but the underlying currency is an extremely important component in parabolic bubble patterns. These patterns can really only occur when a rush of new money is flooding into an economy, as was the case during the earlier parts of this decade, with historically loose credit conditions. The private sector was very busy creating money at unprecedented rates as anybody and everybody could get a loan for just about anything.
This had a massive effect on asset prices -- how could it not? -- as economics 101 tells us that prices go up when there is more money in circulation. So it's not a coincidence that home prices, crude oil, and other tangible assets came crashing down in dollar terms when credit conditions got tighter. After all, the homes and the oil are exactly the same stuff -- the only thing that changed was the dollar value we attach to them. The amount of dollars sloshing around the economy has a huge effect on prices, and not many people that most of the money supply comes from the private sector, and not the government.
Getting back to the bubble in crude oil, we can see a slightly different shape to the lead-in period, but still it took 63 months to hit the blow-off top after the growth curve shifted towards hyper-drive.
And once again, the best gains came after month 45, with prices going ballistic after that bottom. They also went straight up from month 58 to the peak, which is common for this pattern.
A look way back at the Dow Industrials in the 1920s shows precisely this same parabolic 64-month growth pattern.
So are you already starting to see the uncanny similarity between these bubble patterns yet?
After a 32-month lead-in period, the Dow hit the "sprout point" for the steeper growth path, quickly accelerating up to an interim top at month 20, and that brought in a consolidation period that lasted until the precise half-way point of the big pattern, at month 32.
The Dow went into maximum hyper-drive over the second half of the pattern, with the final burst starting off a brief pullback in month 45. From there it was a ballistic launch to the final spike high in month 64.
It's a bit harder to get data on the Nikkei from the 1980s, as it's not included in any of the charting packages that I have -- and I have a bunch -- but fortunately Yahoo has vastly improved their web charts and has enough back data on the Nikkei to enable us to take a look at this amazing bubble pattern.
I apologize that this chart looks so much different, but we can still see how the months unfolded. On this Nikkei bubble pattern the most serious correction happened around month 40, and the bottom following this correction launched the final ballistic phase which culminated in a top at month 65.
The last chart I'm going to show you before looking at gold is the "grand-daddy" of all market bubbles -- the Nasdaq 100 in the 1990s -- which was fueled by a wild mass hysteria for internet stocks. What a remarkable period that was, when ridiculous profits were sloshing around the financial markets day after day. Of course it all came crashing down, but it was quite a heady experience while it lasted.
The bubble in the NDX was so incredibly large that the earliest "sprout" stage barely registers as a blip on the monthly chart of the entire pattern, as it's so small compared to the huge moves that came at the end of the pattern with the typical ballistic, blow-off phase.
But these early moves looked very impressive at the time, as we can see on this chart that is scaled to reflect only the early stages of this growth pattern in the NDX.
What I find most intriguing about this early NDX chart is how similar it is to the current pattern in gold.
There is the same well-organized lead-in period, and then gold takes off on a steeper growth curve at a very similar spot, which I've labeled Month 1. Of course there is a chance that I'm wrong about labeling this Month 1 of the 64-month growth pattern, but it certainly fits with everything I've seen in past bubble patterns.
If this is indeed the early-to-mid stages of a typical 64-month parabolic bubble pattern in gold, then the top will come in around January 2011, and could follow a pattern like the one on the chart below.
It's nearly impossible to forecast how much energy will come in during the ballistic phase of this type of growth pattern, but it is important to note that Month 45 for gold is scheduled for next month -- May 2009. This currently is Month 44.
So any significant corrective pattern that bottoms either this month or next month could lead to a massive blow-off ballistic move for gold. It could be exciting!
Again, let's not get ahead of ourselves with dreams of untold riches, but then again, let's get ready to act courageously --but prudently -- if this pattern continues to develop along this expected path.
As a final note, I would like to address a question that may come up in your mind, and I spent a lot of time asking myself this same question, as it's hugely important. What if the top back in March 2008 was month 64 of gold's parabolic growth pattern? Does that mean gold is just hanging on here, on the verge of crashing?
As we've seen from past bubble patterns, the aftermath of the spike top is not a pretty sight, as prices come down fast and hard, and they don't recover. So the fact that gold has not only recovered so quickly off the quick test down to $681 -- and had a full 4-month recovery -- argues strongly that this growth pattern is not finished, but is instead just about to enter the spectacular ballistic phase where prices go up at an astonishing rate.
Now that we're all clued in to this 64-month bubble pattern, I will of course keep you updated in my daily reports on how this is growing and developing.
Remember, if this pattern does develop as expected, then we can generate enormous profits both on the way up, and then on the way down. So this could be a rare opportunity, where we get one of these patterns just right, both up and down.
Even more tantalizing is the idea that we now have a framework for interpreting future parabolic growth patterns, as I’m certain there will be plenty more bubbles over the coming years and decades. It is inevitable that these patterns will form in an economy with a floating exchange rate, like we have, where the money supply is dictated by credit creation in the private sector, and the free exchange of currencies across borders.
Let's hope there are plenty more 64-month bubble patterns in our future!
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