Pattern recognition March 4, or why diversify?

All learning is pattern recognition as in “monkey see monkey do”. That is how we learn to talk, learn to walk and nearly everything else. Here are two charts to make the point.

nikkei march 4

Tse march 4

At first ,and superficial, blush these two charts are pretty well identical. They break down at about the same time, have their largest move , wave 3, between about September and November/December, then are a little unsure and do show some divergence but after all is said and done they are very,very similar. In fact numerically they are almost in tune, both having started at about 15000 and having dropped 50% to 7000. One has just made a marginal new low, the other may soon do so.

   There is nevertheless a slight difference, one of these two will make a new 25 year low tonight, while the other is only in the 9th month of a bear market. One comes from a high of 38000, now down 81% or so, whereas the other is just down 50% and only 9 months old. They are half a world apart, one is the second largest economy and the other an auto plant for the United States.

   What we learn from this, if we chose to do so, is that , first of all , “diversification” does not work as we live in a global world where correlations approach 1 for just about everything, certainly in a bear market, and secondly that as these patterns do not just occur simultaneously in different markets but also sequentially, it helps if you recognize the pattern early while it still has a predictive value. This is what E-wave is all about!

The top chart is the 225 index, the bottom one the , just in case. Click to enlarge.