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Hypothesis

Klatchs Contradiction to the Efficient Market Hypothesis

By publishing this Contradiction, I have intended to postulate three idioms that I feel are equitable to

Nobel Laureate-like recognition, because each of these hypotheticals have the ability to change

conventional financial theory. Let me summarize the first two theorems as a way to introducing the piece

de resistance of my work to date [May, 2012]. First, I discussed Klatchs Price Theory, which was a theory

based on market ranges, which lead markets to break/expand those ranges for some unknown,

unquantified reasons. Second, I stated Klatchs Marketome Theory, which was essentially the application

of Klatchs Price Theory with respect to the purpose for an index (as I redefined) to always obtain new alltime highs, and should that goal not be reached, then, the markets would have the potential to fall apart

through either deflation or through Price Pattern Objectives pointing to less than zero. However, this third

theorem-like discussion, which I have yet to clarify to the reader, is a mathematical contradiction to the

Efficient Market Hypothesis (or efficient markets theory), which is why I see this Chapter as the piece de

resistance of this entire book. Thus, my proposed solution in order to contradict the Efficient Market

Hypothesis could stand alone as its own, valid conjecture that is separately eligible for Nobel status

because I have, finally, conclusively determined that the need for traders exists in the market. This

question has always existed, and many people feel that traders harm investors,. However, mathematically

and conceptually, this person validates the reason for the trading profession, and I believe this

mathematical contradiction sheds insight on why people like me should exist as a market participant.

Now, I must apologize if I have offended anyone by equating my (somewhat) simplistic contradiction to

Nobel Prize worthy edification, but I am hopeful that by making this claim, these contradictions and/or

theorems can be validated and/or expanded by the caliber of people that cling to the Nobel society. In a

way, I am posing the question and a possible mathematical solution to the Royal Academy of Sciences in

Stockholm, Sweden. Therefore, I am acquiescing to this market in order to validate all of the discussions

I have postulated thus far. Whats more, by asking for this type of recognition, I am trying to invoke the

Law of Attraction along with the biblical quotation that says, We have not because we ask not. What is

more, this third collegiate level assertion is something that I feel is more concrete because it has

mathematical basis. In addition, I feel that if one were to evenly weigh the two theorems and this

mathematical contradiction with other Nobel Laureate-types like Mr. Harry Markowitz, who defined the

Modern Portfolio Theory; one would find that my three idioms would be just as ground breaking for the

financial industry.

Again, I do not say these egotistical conclusions without relevance, and I must apologize for the lack of

humility and humbleness, but I am angered by Mr. Markowitzs idiotic theory, which the financial

community has embraced as being the de facto standard for money management. I say this because Mr.

Markowitzs theory is completely illogical and against the purpose for the market investor, while being

purposeful for the money manager. Thereby, I conclude that his theory only exists to keep mutual fund

managers and the like gainfully employed while neglecting the best outcome for the client. In a way, I see

that Mr. Markowitzs Modern Portfolio Theory is an illogical solution that is solvable if one were to invoke

Nashs Game Theory, which would easily show that it is not the optimum solution for all parties! Thus, if a

person can win a price, a Nobel Prize no less, for an idiotic theorem like Modern Portfolio Theory, then I

have no qualms about my egotistical assertions that the two theorems listed thus far and this

mathematical contradiction that is outlined in this concluding Chapter are qualified for a similar prize. In

fact, I must make one last claim about the ignorance of Modern Portfolio Theory, and that claim is that I

would equate Modern Portfolio Theory to a more elaborate scheme then I was ever charged with by the

government. I say this because Modern Portfolio Theory is a scheme that allows Investment Advisors and

mutual fund managers to stay gainfully employed while simultaneously preventing their investors from

achieving the full gains derived from the white swans, which means this theory has cost people more

money then I ever have. That said, I am extremely fortunate to be given this gift of intelligence by God,

which allowed me to formulate these theorems and this Contradiction, and to God, not man, do I remain

humbled. Accordingly, my intelligence has now led me to find a method using defined terms in this book in

order to contradict the Efficient Market Hypothesis through logic. Thus, let me begin the contradiction.

In order to dispute the Efficient Market Hypothesis (or efficient markets theory), we need to prove that for

any given point in time, there exists enough information that will conclude that at that point in time, we

have two alternate prices that are more efficient. Hence, we have three prices coexisting and independent

from one another: two efficient prices and one non-efficient price. A non-efficient price would indicate that

at that moment in time, we would have two simultaneous efficient prices that tell us there is an underlying

profit. As such, having three prices coexisting at the same point in time would disprove the efficiency of

the market by mathematically concluding that the market cannot be efficient because the non-efficient

price has some factor of discernible profit. In order to accomplish the contradiction, we need to use

theorems from mathematics, economics, intrinsic market structure (defined within this text), and

relativity. In addition, we need to discuss the actual concept of time, which has occurred at many points in

this text as well.

For the non-mathematically inclined, I need to refer to revenue. In Chapter 2 of my book, I discussed that

when we use revenue in determining a market capitalization-based stock price, we may have two prices.

We will have the current stock price that is based on the current revenue, but we may have a future stock

price that is based on expected revenue growth, which created a price range based off these two revenue

calculations. Therefore, the fundamental argument, which is quite simplistic compared to what lies ahead,

is that there are always two simultaneously accurate prices in a stock price, unless revenue was to remain

constant. Even then, (and I assert that constant revenue is not possible unless it is contractual) whenever

a stock price is not equal to its market capitalization-based stock price, then, there must always exist a

simultaneously linked stock price. Therefore, we can conclude that from a fundamental perspective there

will always exist two possible stock prices based on current revenue or future revenue unless revenue was

to remain constant and the value of the stock price was to remain constant as well.

Now that I have addressed a fundamental, logical reason for inefficiency, let us get to the math. In order

to begin the mathematical contradiction, we will define that for our purpose, we need to use the set of

positive, real numbers. We will define XN to be price and YN to be time for N 0. This will be represented in

the X-Y coordinated pare as (XN, YN), which is actually an inverted Cartesian plane.

Next, we will assert the definition of a subset of (X N, YN) in 4 representative sets: (X0, Y0), (X1, Y1), (X2, Y2),

and (X3, Y3). Along with this subset, we will still have variables for X N, YN for all N > 3. In order to utilize

market structure, we will set forth constants on our subset in order to define a Range. These constants

are: 0 X0 < X1 < X3 < X2 and 0 Y0 < Y1 < Y2 < Y3. Now, I claim that for the Efficient Market

Hypothesis to be valid, XN = X2 for all YN > Y2 and N > 2. In order to remove range bias, we also constrain

the values as follows: |X2 X0| = |X1 X0|. This last constraint simply means we have equality of the

range, which could be stated as the 50% retracement.

The graphical representation of this range with constraints is shown in Figure E.1. In this graph, we have a

range that shows an infinitely continued price at the mid-point of the range as indicated by the arrow. In

addition, we have used the defined (X2, Y2) point to visualize a point for N > 2.

In order to prove that XN = X2 for all YN > Y2 and N > 2 must be true, we need to use the definition

regarding the valuation of an asset at any given point in time, which is simply the last transacted price

defined by a buyer and by a seller at some point in the past. Therefore, the only way to define the current

price of an asset, in the present moment, is to utilize our knowledge of the current bidding price and the

current asking price, which means that we can make a transaction occur in the present moment at either

of those price levels. We will assume that we are a buyer for the sake of explanation, which means that

our current price is the asking price at our current present moment of time, and we will see at the end of

my contradiction that we will successfully cover the demand side (the bidding price) as well. However, in

order to base the efficient valuation at the current time, we only have the last known exchange by a buyer

and by a seller because we cannot guarantee a price match at the current Y N (time) since bidding/asking

prices may change. Hence, the last known price exchange must be (X2, Y2). The problem is that once that

transaction is recorded, time has already shifted forward into a value such that Y N > Y2. This would be the

present moment. Therefore, to assume efficiency for all YN > Y2, we would need the current asking price for

all YN > Y2 to be XN = X2 for all N > 2. This is the hardest concept to grasp, but it is the basis for the start of

contradiction.

To explain in a clearer manner, I am simply stating that the last known transaction was efficient at the

time of that transaction, but we only have that transaction to base our valuation for the current present

moments efficiency because, as any trader can tell you, we cannot guarantee a price match at current

bid/ask price. Therefore, we must have an infinite amount of supply at the asking price where the asking

price is equal to the last known price. We can further conclude that, in the present moment of time,

theEfficient Market Hypothesis states that the current efficient price at our present moment must be based

on knowing the current price in the present moment, but we only have knowledge of this price if it is

derived from the last recorded price! Thus, this last recorded price must rely on a historical price / the

last transaction! As such, the asking price is the only way to find our current price in the present moment,

and this is where we find our contradiction because we cannot guarantee a future transaction at any Y N >

Y2. This means we have two contradictions in order to disprove the Efficient Market Hypothesis:

1.

2.

Now, I will use Klatchs Price Theory in order to define a point (X N, YN) such that for any YN > Y2 there also

exists multiple possible values for price XN at the same YN such that one XN is greater or less than another

XN for the same point in time YN. This means we have two potential prices (the Price Objectives from

Klatchs Price Theory) at one point in time, and in order to prove the contradiction, we have to prove that

these prices exist simultaneously in time. In a way, I also see this as a possible intrinsic proof for my own

theory, and this is why I chose a range in order to define the contradiction of the Efficient Market

Hypothesis. However, my Price Theory is not needed in order to prove the contradiction, and I am only

illustrating it with my contradiction in order to posit a possible, graphical explanation of how my own Price

Theory could define the future profit.

In order to begin proving the existence of multiple prices coexisting at one time, we will be working with

the same subset that we have already defined, and as we saw, this subset yielded a range where by all

XN= X2 for N > 2. This meant that in our graph, we were printing continuous price at X N = X2, which was

the 50% retracement of the range D: (X0, Y0) (X1, Y1). However, since supply cannot be infinite, we must

prove that XN X2 for some value of N > 2. As such, the opposite argument, which would prove

theEfficient Market Hypothesis, would state that for all times, YN, we cannot have a conclusive basis for

profit (P). As such, for Efficient Market Hypothesis validity, P = 0 for all (XN, YN). Therein, the

contradiction of the Efficient Market Hypothesis lies in proving X N X2 for some value of N > 2, whereby P

0.

In order to prove the invalidity, we can now utilize mathematics from our currently defined equations.

Hence, XN X2 0 for some value of N > 2, and since P 0, we have X N X2 = P. Since we are reliant on

positive prices we can further state that | X N X2 | = P for some N > 2. Since we have already discussed

that supply cannot be infinite, we know that for some X N for N > 2 that XN X2, which proves the validity

of the already defined equation | XN X2 | = P at some value of N >2. We know that at some YN for N > 2

we will have exhausted the supply at our asking price for using our valuation, which means that our

historical price reference has now shifted. Now, we can remove the absolute value of our base equation in

order to see that once supply is exhausted at some point in time Y N at N > 2 we visualize that for our last

historic price, we yield X2 = XN +/- P. Therefore, the efficient price(s) when supply is exhausted is X N +/P. Now, if P>0 then XN > X2-P which means that here we have disproved theEfficient Market

Hypothesis because at some point in time, the present moment can no longer rely on the previously

matched price, and that we have knowledge of multiple possible prices existing at some time Y Nfor N > 2.

In order to assert the graphical illustration of how my own Price Theory can find our profit targets defined

as Price Objectives, we can look to one of the +/- P equations. (Again, this is not necessary to prove the

contradiction, but it is helpful in observing values of P.) Let us choose X N = X2 + P if P>0. This means that

no matter what the retracement of a range is, we have proof that the market will challenge a high based

on the knowledge that for some value in time of YN for N > 2 we have the last known price X2 at N = 2, but

we also have the present moment price for N > 2 which has been defined as X 2 +/- P. This means that we

can conclude that whatever the value is of the range, there are two simultaneous profit objects, which may

occur inside the range, outside the range, or at the extremes of the range. The important proof is that we

know that the market has a Price Objective at one of our defined points based on our knowledge of prices

that are not efficient: X2 + P or X2 P. In a way, for P > 0, we have proven the profit potential for long

trades and for P < 0 we have proven the profit potential for a short trade. We also have to rely on the fact

that a buyer and a seller must be constrained by price as a subset of the real, positive numbers. As such,

since X0 X1 and X0 X2 we can define three numbers that may exist as a simple illustration of the

contradiction and the intrinsic proof of Klatchs Price Theory. We can set X 0 = 0.01, X1 = 0.03, and X2 =0.02

if we use our new constrained set and P is set to either +/- 0.01. Since P 0 we can conclude the visual

representation in Figure E.2, which proves that for some YN when N > 2 the price of XN may equal X0 or

X1 when supply at X2 is exhausted and the amount of profit is defined as the distance from the top/bottom

of the range to the last known price, which satisfies Klatchs Price Theory as well.

Therefore, I have concluded the contradiction fundamentally using logic, mathematically using

supply/demand, and also visually via Klatchs Price Theory. Thus, I have proven multiple values of price at

the same point in time since supply cannot be infinite, which occurs for P > 0. In addition, we can

rationalize that demand cannot be infinite for our last known price, which means P < 1. Thus, the

contradiction is complete for both sides of the required economic argument, and the Efficient Market

Hypothesis is invalidated.

As a corollary, which is in regards to the second contradiction in regards to finite time, if we are also to

believe that time is not infinite based on observations derived in the theory of Relativity, then, we would

also be faced with a terminal point to disprove the Efficient Market Hypothesis as well because when time

ends, then there can be no more asking/bidding price at that point in time. If that occurs, we are placed in

the same graphical representation of what happens when supply/demand at a given price ceases to exist,

and the proof of what happens, when time ends, is already intrinsically stated.

As I have stated through this contradiction, we have to understand that profit, P, exists. Once we have

proven its existence, I find that my contradiction is easily equated to Heisenbergs Uncertainty Principle in

Quantum Mechanics. In order to visualize the correlation, we observe that once supply or demand

approach an asymptotic limit, which creates our P, we can visualize that P can exist in multiple places

at one time, and by utilizing concepts I have stated in this book, we can see that P can exist at our Price

Objective, our Price Pattern Objective, or at new Price Objectives that are created as time/ranges expand,

and P is essentially determined by wherever the market wants it to be; we only need to prove that it

exists in order to satisfy my contradiction, which makes P as elusive as an electron.

Furthermore, the purpose to disproving the Efficient Market Hypothesis is necessary to do for the trading

vocation, and it is why I have thought about this contradiction for almost ten years. For the trading to

logically exist, the trader cannot believe in the Efficient Market Hypothesis for, if the trader did, the trader

would essentially be saying that he/she does not believe that he/she has a definable trading edge at any

given moment in time, and if the markets were efficient there would be not justification for trading aside

from investing and/or hedging. If the efficient market hypothesis held true, the trader is essentially

resigning himself or herself to the logic that trading is a random, gamble. Thus, my whole book has been

written to disprove that thought process, and I believe that if my contradiction is someday confirmed,

people that participate in the trading vocation, can rest easy in the knowledge that markets are inefficient,

which means that defined trading edges have validity. Thus, profit, P, is possible, and the reason to

trade is justified.