TUBB'S LAW OF PROPORTION
That stock and commodities markets advance and decline in an unending series of lurches, swings, and trends is unanimously accepted. Where people disagree is about the cause of that movement and about whether or not an index, stock or commodities price history is at all useful for forecasting its future prices. Academics seem to line up behind the Efficient Market Theory popularized by Burton Malkiel in his 1973 book A Random Walk Down Wall Street. One of Malkiel's propositions was that a stock's or commodities' price was always at the time of the quote an accurate reflection of its value because market participants, in the aggregate, had properly weighed and discounted all the variables comprising value. Malkiel's book is in its 7th printing and still widely read, but I have yet to find a single person who experienced the dot.com fiasco who can rationally defend that proposition.
On the other side are those who may say that markets are more emotional than rational, the manifestation of greed and fear, and that even if every short term move is not predictable that over time action-reaction patterns become evident. Frank Tubbs was one of the first published market technicians to quantify the process of action-reaction. His Stock Market Correspondence Lessons were written in the 1920s and 1930s when wild swings were the order of the day. Lesson 9 of Tubbs' correspondence course was titled the Law of Proportion.
Tubbs claimed an 80% success rate of predictions made according to his Law of Proportion.
According to Tubbs:
Aggregates and individual stocks tend to run one-half, two-thirds, three-fourths of previous moves. First in relation to the next preceding move which was made. Then in relation to the move preceding that.
According to the Law of Proportion the reaction from the 30-100 swing (70 points) would be from 35 points (50%) to 52 points (75%), immediately followed by counterswing in the same direction of the next preceding swing. The counterswing would have a 1/2, 2/3, or 3/4 relationship to the bear swing from 100-46 and the bull swing from 30-100. The action-reaction process would continue until the high or low of the next preceding swing was broken.
Tubbs said that his Law of Proportion was a guideline and not a rule. That's something I would like to hear more often from some of today's market technicians! Computer traders would dismiss Tubb's work as obvious to irrelevant. Perhaps it is although I suspect that rigorous back-testing with the addition of a few strict entry-exit rules would validate Tubbs' Law of Proportion as a worthy trading system. In any event Frank Tubbs deserves your recognition for his pioneer work in quantifying the market's action-reaction phenomenon.
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