The Behavioral Analysis Model predicts future price movements in human traded markets through the study of market participants’ emotional responses during periods of high emotion and “capitulation.”
These periods of elevated emotion and capitulation are the result of market participants’ natural “mood swings” between optimism and pessimism—which are intrinsically driven by greed and fear—and the outcome is an emotional turning point commonly referred to as a “price reversal.”
The B.A. model captures fractal-level data “footprints” created during these periods of elevated emotion and uses that data to predict future turning points as well as periods of strength and weakness.
The “guts” of the model are based on proprietary computations, the components of which include elements of—but are not exclusive to—the Fibonacci sequence and its golden ratio, fractal studies, and several unique capitulation thresholds. The B.A. model is equally effective in its ability to predict price movement whether the data input involves an individual stock, stock indexes, sector funds, currencies or commodities and can be used to trade or invest in any time period—intraday, intermediate, or long term.
As a rule, B.A. can be used to generate information about future price movement in any market as long as the primary traders in that market are human beings.
The more active and volatile, i.e. the more “emotional” the market, the better the results of the B.A. system in predicting future price movements and, because of this feature, predictions of future price movement are most sought after during periods of “apparent” chaos whether related to political, social or meteorological uncertainty.
Data output created by human reaction to greed and fear thresholds is measurable, and through these measurements future market psychology can be predicted hours, days, weeks, months, years, and even decades before actual trading takes place.
Market reversals are an inevitable result of excessively bullish or bearish sentiment (greed or fear) and it’s that “emotion” that causes the majority of traders to enter positions on the same side of a market at roughly the same point in time–which in turn leads to a price reversal.
The B.A. model uses clues created by today’s emotional responses to market behavior in order to predict future market reversals, allowing followers of the system to enter or exit positions near the highs or lows of market movements while at the same time providing an extremely favorable risk/reward ratio.
According to the principles of “behavioral analysis,” events unfolding in today’s financial markets are currently creating a map of the future that will be strictly followed regardless of any attempts through human intervention to change the outcome of price movement.
The logic behind this assertion can be attributed to the fact that, regardless of lessons learned by previous generations, human beings seem predisposed to repeat both positive and negative behavior exhibited by past generations. In fact, it is this dynamic that spawned the popular adage “history repeats itself.”
Because of this assumed “law of nature,” market participants’ reactions to future events—although dynamic in emotional extremes—will continue to elicit greed and fear, driven by the intrinsic human desire to pursue pleasure and to avoid pain, and that in turn will result in predictable repeatable reactions in financial markets.
Although these characteristics of “human nature” and their effect on traded markets are generally accepted by market participants, the model’s ability to predict when these emotions will again surface—and the intensity with which they will move markets—is the key differentiator between the B.A. model and more conventional market analysis tools.
The BA model’s ability to predict future price action is scientifically unexplainable but well documented through past performance and, in many cases, market reaction to news releases, natural disasters and other events that appear to “shock” certain markets, have been predicted by the B.A. model days or even years before the actual fundamental events unfolded.
Among the long list of examples seen in the past are crop freezes, hurricanes, droughts, foreign government announcements, Federal Reserve policy releases, and rumors of dubious origin.
Random-walk, Harmonic, and Color Chaos Theories; Skepticism Concerning Financial Market Forecasting
Scientist, economists, scholars, and the public at large generally view financial market price action as completely unpredictable.
Their explanation for price movement is attributed to a reaction created by news events, earnings releases, rumors or mystery, and although the reaction to these items is certainly what “creates” price movement through the buying or selling of the underlying market, the B.A. model suggests that the reaction itself, whether positive or negative, i.e. optimistic or pessimistic (greedy or fearful) is predetermined and not at all unpredictable, random or chaotic.
In other words, while the emotional reaction to an external stimuli may “create” the price movement, predetermined laws of nature “cause” the reaction to be positive or negative, which in turn “cause” the price movement to travel in a predetermined direction. In many cases, each of these stimuli could be, or would be, simply shrugged off if it were to have occurred during a different period in the “emotional cycle.”
Technical and Fundamental Analysis vs. Behavioral Analysis
When compared to Technical Analysis or Fundamental Analysis, Behavioral Analysis, I believe, creates significant value through its predictive, as opposed to reactive, nature. Most technical analysis tools follow current price action and generate indicators which provide buy and sell signals after price movement has already occurred.
The fact that technical support levels sometimes hold and sometimes do not, and the fact that an identical piece of fundamental news can be reacted to in a positive or negative manner on the same day, lends very little predictability to the use of technicals or fundamentals when trying to anticipate future directional movements in financial markets.
Although it is evident that important information as to the strength or weakness of a financial instrument can be gathered when support or resistance levels hold or fail (or when news events or earnings reports are interpreted as positive or negative) the ability for a technician to consistently predict price levels that will hold or fail and the ability of a fundamentalist to consistently predict when news will be construed as positive or negative, remains a challenge.
In both cases the ability to predict seems to hinge upon the individual analyst’s skill in his particular market discipline and his years of experience in observing the markets.
Behavioral Analysis, by comparison, is predictive in nature and based on external laws of nature, which can be expected to “cause” traders to change their perception of current market conditions before they themselves have made a conscious decision to change their perception.
One tenet of B.A. is that “at a certain point in the future—hours, days, week, months, or even years from today—traders’ attitudes will shift from optimistic to pessimistic (or vice-a-versa) regardless of their current bias, bullish or bearish, and with that shift will come a price reversal in the market.”
According to the BA model, price action follows predetermined patterns based exclusively on human emotion.
Cycle Studies vs. B.A.
Technicians schooled in the study of cycles can at times be very accurate in determining potential “turning points” or trend reversals in the future, but because of “cycle inversions” their ability to predict whether or not the cycle will bring a high or a low into the turning point date is questionable at best.
Because of this flaw, it is unrealistic to establish sizable positions either long or short with any degree of confidence prior to the turning point.
The B.A. model, by comparison, predicts future price highs and lows days, weeks, months and years into the future and is rarely susceptible to price “inversions.” This valuable feature of the B.A. model allows advanced planning and portfolio adjustments in anticipation of future market movements.
Boom and Bust Cycles
Boom and Bust cycles seem to be cyclical and predictable, but not in the sense that the cycles are “fixed” or recurring in their time element.
Common sense and financial market history teaches us that it takes much longer for a market to recover from the bursting of a bubble than it does from a reaction during a more moderate advance in prices. Both booms and normal advances are cyclical in the sense that expansion is followed by contraction, but the extent and duration of the contraction phase should be anticipated to be proportionate to the extent and duration of the preceding advance. In this sense, cycles are generically predictable.
Cycles Within Cycles
Within long-term cycles, millions of cycles of smaller degrees (fractals/recursions) are constantly unfolding. Capitulation within capitulation marks ever-smaller data components of the BA model such that tick data and monthly data exhibit the exact same capitulation characteristics.
Because of this “law of nature” the B.A. model is able to back test what equates to more than thousands years of long-term market movements by studying capitulation patterns created by multiple years of intra-day tick data.
Pain Thresholds and Their Dynamic Nature
A market participant’s ability to withstand pain (losses) will fluctuate on a second by second, minute by minute, hour by hour, day by day, week by week etc. etc, basis and regardless of his best attempts to contain his emotions; he will eventually succumb to the irresistible force to capitulate at each and every individual cycle period threshold.
Even using a black-box discipline with fixed stop-loss controls, investment decisions are vulnerable to human emotion on various other macro levels.
According to the B.A. model, heavy losses come at times when emotional thresholds are super-resilient and therefore able to endure very high levels of pain, and small losses come at times when emotional thresholds are non-resilient and therefore unable to endure almost any level of pain. This explains why the best, most disciplined traders in the world will occasionally let a loser run (instead of immediately cutting his losses) and, we believe, this type of mistake can only be attributed to a temporarily elevated pain threshold.
It is because of this tendency toward dynamic thresholds for pain (losses), that the B.A. model was designed using dynamic measurement components, that is, the ability to discern controlled capitulation from final capitulation. Many market technicians use fixed plus and minus tick reading (+1000 to +1200 or -1000 to -1200) as a capitulation trigger to enter sell or buy orders.
The B.A. model ignores fixed interpretations of this indicator because crashing markets, such as the US stock market in 1987 proved this indicator unreliable. Only a dynamic measure can provide reliable results in predicting future emotional pain thresholds in human beings, because cycles in human resiliency clearly dictate that what may be viewed as highly painful on one day will register only as an annoyance on another day.
The BA Model as an Investment Tool in Trend Following
With its predictive forecasting advantage, the B.A. model allows investors to understand the major trend of the market and to therefore establish sizable positions (or even add to current position on pullbacks) as the trend unfolds. Conversely, the model allows an unwinding of positions into a turning point as well as contrarian investing in anticipation of a major trend reversal.
In addition to these predictive abilities—which allow investors to anticipate market direction—the B.A. model will allow investors to fade the market in situations where the market is temporarily moving in a direction contrary to the direction projected by the model. In these situations the traders adage “the market is never wrong” is incorrect and although the market will never be permanently “wrong,” it is occasionally susceptible to incorrect directional movement on an hourly, daily, weekly, monthly or even yearly basis.
In these cases of temporary price inaccuracies, the B.A. model will send a message to the trader that an immediate shock, creating a price reversal, is in the offing.
This provides the ability to fade the prevailing trend whether up or down when the model warns of an ensuing price reversal and it allows the perfect opportunity to use a long option strategy with puts or calls in order to take advantage of the predicted sharp, immediate price reversal.
Conversely, when a market thought by most traders to be overvalued or undervalued continues to advance or decline to levels commonly viewed as unrealistic or even absurd, the B.A. model will assist the investor in staying with the trend far beyond levels considered prudent by even the most bullish or bearish of investors.
The B.A. Model as an Investment Tool Using Buy and Sell Signals
Buy and Sell signals occur only if emotional capitulation triggers certain parameters within the B.A. model.
Not all market reversals originate from, or end with, B.A. model buy or sell signals, but many of the more significant moves tend to emerge from these signals. This makes sense, because capitulation–although sparked by seemingly rational reactions to fundamental or technical observations–always occurs at exactly the wrong time. It is only through the majority being wrong that capitulation occurs, and as a result bottoms or tops in price are created.
Although the B.A. model is capable of assisting many different types of investment strategies, I believe one of the most exciting and potentially profitable areas of investment will be within the futures and commodities markets.
The risk/reward relationship inherent in buy and sell signals generated by the B.A. model, along with its innate ability to assist in entering positions prior to “shock” events, creates a unique opportunity to realize very large gains. To participate in these opportunities while at the same time limiting risk, a long-only option strategy utilizing front month expiration contracts would be the ideal investment vehicle.
About the Developer of the B.A. Model
J.G. Savoldi is a graduate of Auburn University in Alabama where he majored in Criminal Justice Law. After graduation he worked in various jobs and during that period spent six years studying the price movements of financial markets with a focus on the Dow Jones Industrial Average.
Focusing on hourly price bar movements using R.N. Elliott’s “Elliott Wave Theory” Savoldi found the method exciting in its potential but “lacking in its ability to make truly accurate predictive forecasts.”
It was at that point he set out on a twenty-year journey determined to build an entirely new investment theory based on capturing data generated by “fractal capitulations”—a discovery he found to be the key components in all market turning points.
After integrating his new discovery into his proprietary BA-VI (Behavioral Analysis Velocity Indicator) Behavioral Analysis of Markets was born as well as his proprietary “BAM Model.”
Shortly thereafter, Savoldi was hired by a multi-billion dollar hedge fund in San Francisco California where he was able to use the model to predict the top of the housing bubble in 2005 as well as the collateral damage in financial markets and economies around the globe.
After the model’s high profile success—including its pinpointing of the huge bull market in both corn and wheat—Savoldi launched “The BAM Report” and set out to offer his services to a select group of stock and commodity hedge funds around the globe.
Mr. Savoldi’s work has drawn increased attention recently based on the extraordinary success of Nassim Nicholas Taleb’s book titled “The Black Swan” as well as Taleb’s previously published book titled “Fooled by Randomness.”
Ironically, Mr. Savoldi disagrees with Mr. Talebs assertion that market events are unpredictable—a disagreement based on the fact that his “BAM model” not only predicted the collapse in the US real estate market, it also predicted the collapse in the mortgage brokers, securities brokers, banks, and retailers.
Adding to his recent notoriety, Mr. Savoldi used his behavioral analysis theory to predict an unlikely “melt-up in the Japanese Yen” as well as the speculative top in crude oil—predicting “an immediate collapse to the 87, 47, and 36 dollar level”—at a time when crude oil was trading at 147 dollars per barrel!
Winning forecasts in markets as varied as stocks, currencies, crude oil, corn and wheat, are fast proving that “predicting markets” is not only possible using behavioral analysis—it’s very profitable as well!
The Behavioral Analysis of Markets Model has been in development since 1989 and is fast becoming a worldwide leader in forecasting excellence.
J.G. Savoldi currently lives in San Francisco California.