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[Ilya 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.
[Yamada] "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".
[Shaw] "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".
Simple Technical Trading Rules and the Stochastic Properties of Stock Returns, BROCK, LAKONISHOK and LeBARON, 1992
"This paper tests two of the simplest and most popular trading rules--moving average and trading range break. Overall our results provide strong support for the technical strategies that are explored".
Currency Orders and Exchange-Rate Dynamics: Explaining the Success of Technical Analysis, Osler, 2001
This paper provides a microstructural explanation for the success of two familiar predictions from technical analysis: 1) trends tend to be reversed at predictable support and resistance levels, and 2) trends gain momentum once predictable support and resistance levels are crossed.
Trading 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 strongest".
Gap Trading, Nassar
"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 lower".