Prigogine] (Nobel Laureate) suggested
that all natural systems rotate between order and chaos and move
from one plateau to the next. The moves between the plateaus
are fast and directional giving us the order component.
The plateau component is non-directional, thus chaos is
bubbling beneath. From here comes the impulsive or explosive
reactions that the majority fail to react to.
"Bases represent periods of accumulation during which a stock
moves from weaker to stronger hands until there
is enough "demand" to push prices up through the base/consolidation.
The ensuing uptrends represent aggressive demand
for the stock. The frequent setbacks in price represent opportunities
to initiate or add to positions".
"A consolidation is a sideways price pattern
within 10% of an established market peak; A correction
is a decline of 10%-20% off a peak; and A bear
market is a decline of 20% or more off a peak".
Rules and Stock Returns: Some Preliminary Short Run Evidence from
the Hang Seng 1985-1997, Coutts & Cheung
"The paper investigates the applicability and validity of trading
rules in the Hang Seng Index on the Hong Kong Stock Exchange for
the period January 1985 to June 1997, and for two subsamples of
equal length, partitioned from the whole sample. It is concluded
that the Moving Average Oscillator and the Trading Range Break-out
rules appear to be present, to varying extents, for all three data
samples, although the Trading Range Break-out rule is by far the
"With the increasingly volatile markets recently, many issues
indicate supply/demand imbalances at the open. These imbalances
present themselves as what are known as "gaps". Gaps are
created by order imbalances before the open. News is generally the
catalyst that fuels these imbalances. It's important to explore
situations when a gap will not hold and close, or when they do hold
and follow through. Stocks that fail to meet the levels of the gap
opening have a greater propensity to retrace and close much of the
opening gap. Conversely, stocks that remain strong and trade to
new highs after the open will have a greater propensity to follow
through and trend higher. In the example of bearish gaps, as a rule,
the opposite is also true. Stocks that hold a price level after
gapping down will often close the gap and trade higher, while stocks
that find new lows after a gap tend to follow through and trend