The Ising model is a mathematical model of ferromagnetism in statistical mechanics. The model consists of discrete variables called spins that can be in one of two states. The spins are arranged in a lattice or graph, and each spin interacts at most with its nearest neighbors. The goal is to find phase changes in the Ising model, as a simplified model of phase changes in real substances.

In 2000 while working on the Murphy's Price - Volume - Open Interest I started scribbling arrows in a 3 by 3 grid talking about how Price - Volume - Open Interest (PVO) should define trends. The PVO model looked like an Ising model.

Today I will try to explain the 10 year old analogy. In an antiferromagnet there is a tendency for the intrinsic magnetic moments of neighboring valence electrons to point in opposite directions. When all atoms are arranged in a substance so that each neighbor is 'anti-aligned', the substance is antiferromagnetic. Antiferromagnets have a zero net magnetic moment, meaning no field is produced by them.

Antiferromagnetism can be considered like a neutral market as anti aligned spins (Fig. 1) are similar to non confirmations. Many non confirmations also mean undecided market. From a PVO perspective, it could be a stock with a positive spin and another with a negative spin causing the aggregate market to be neutral.

With the passage of time the neutral situation leads to a topping or bottoming situation, in other words a market bias, spin, direction, Ferromagenetism. A topping, where a market reverses direction sees the price pointing lower, volume leading higher and drop in open interest position (as longs square off – Fig 3). On the other hand a bottoming market ready for reversal is when the prices point up, volumes are still lackluster and negative, but open interest starts to build up new long positions (accumulation – Fig 2). This confirmation among stocks finally gives a negative and positive bias to the market. This is how stock markets could have physics parallel in the Ising model spins. The Ising model could also validate the weight of evidence approach in technical analysis.

Mukul Pal, CMT, Orpheus Capitals, Global Alternative Research