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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.

Efficient Market Hypothesis Visualization

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
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:


Supply or Demand cannot be infinite from Economic Laws / Theories


Time may not be infinite based on Relativity.

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
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.

Visual proof of Supply Exhaustion

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.