Abstract: Ask one hundred investors whether this is a bull market or a bear market, and you are likely to find their opinions split evenly down the middle. No one is really certain that the September 2001 low marked the end of the bear market and the start of a new bull market. But, this uncertainty is nothing new. As long as stock exchanges have existed, analysts and investors have always placed heavy emphasis on the difficult task of identifying the primary trend of the stock market. Everyone’s ideal market strategy is, at least in theory, to avoid the ravages of each bear market, and then to move aggressively into stocks after each important market bottom. To further maximize the benefits of a new bull market, time is of the essence. An investor should buy as close to the final low as possible. This is the ‘sweet spot’ for investors -- the first few months of a new bull market in which so many stocks rise so dramatically. But, theory and reality, especially in the stock market, are often entirely different matters. To bring this theoretical investment strategy to reality, an investor would need a time-tested method of identifying major market bottoms – as opposed to minor market bottoms – and would have to apply this method quickly, to capture as much of the bull market as possible. Traditional methods of spotting major turning points in the market often leave a great deal to be desired. The financial news typically remains negative for months after a new bull market has begun. The economic indicators offer little help since, historically, the economy does not begin to improve until about six to nine months after the stock market has already turned up from its low. Even some widely accepted technical indicators, such as 200-day moving averages or long-term trendlines, can sometimes take several months to identify a major turning point in the market. To spot an important market bottom, almost as it is happening, requires a close examination of the forces of supply and demand – the buying and selling that takes place during the decline to the market low, as well as during the subsequent reversal point.

Abstract: Using two sets of data, including daily prices (open, close, high and low) of all S&P 500 stocks between 1992 and 1996, we perform a satistical test of the predictive capability of candlestick patterns. Out-of-sample tests indicate statistical significance at the level of 36 standard deviations from the null hypothesis, and indicate a profit of almost 1% during a two-day holding period. An essentially non-parametric test utilizes standard definitions of three-day candlestick patterns and removes conditions on magnitudes. The results provide evidence that traders are influenced by price behaviour. To the best of our knowledge, this is the first scientific test to provide strong evidence in favour of any trading rule or pattern on a large unrestricted scale.

Abstract: Ask one hundred investors whether this is a bull market or a bear market, and you are likely to find their opinions split evenly down the middle. No one is really certain that the September 2001 low marked the end of the bear market and the start of a new bull market. But, this uncertainty is nothing new. As long as stock exchanges have existed, analysts and investors have always placed heavy emphasis on the difficult task of identifying the primary trend of the stock market. Everyone’s ideal market strategy is, at least in theory, to avoid the ravages of each bear market, and then to move aggressively into stocks after each important market bottom. To further maximize the benefits of a new bull market, time is of the essence. An investor should buy as close to the final low as possible. This is the ‘sweet spot’ for investors -- the first few months of a new bull market in which so many stocks rise so dramatically. But, theory and reality, especially in the stock market, are often entirely different matters. To bring this theoretical investment strategy to reality, an investor would need a time-tested method of identifying major market bottoms – as opposed to minor market bottoms – and would have to apply this method quickly, to capture as much of the bull market as possible. Traditional methods of spotting major turning points in the market often leave a great deal to be desired. The financial news typically remains negative for months after a new bull market has begun. The economic indicators offer little help since, historically, the economy does not begin to improve until about six to nine months after the stock market has already turned up from its low. Even some widely accepted technical indicators, such as 200-day moving averages or long-term trendlines, can sometimes take several months to identify a major turning point in the market. To spot an important market bottom, almost as it is happening, requires a close examination of the forces of supply and demand – the buying and selling that takes place during the decline to the market low, as well as during the subsequent reversal point.

Abstract: The primary purpose of technical analysis is to observe market events and tally their consequences to formulate predictions. In this sense market technicians are dealing with statistical probabilities. In particular, technicians often use a type of indicator known as an oscillator to forecast short-term price movements. An oscillator can be viewed as a high pass filter in that it removes lower frequency trends while allowing the higher frequencies components, i.e., short-term price swings to remain. On the other hand, moving averages act as a low pass filters by removing short-term price movements while permitting longer-term trend components to be retained. Thus moving averages function as trend detectors whereas oscillators act in an opposite manner to “de-trend” data in order to enhance short term price movements. Oscillators and moving averages are filters that convert price inputs into output waveforms to magnify or emphasize certain aspects of the input data. The process of filtering necessarily removes information from the input data and its application is not without consequences. A significant issue with oscillators (as well as moving averages) for short term trading is that they introduce lag. While academically interesting, the consequences of lag are costly to the trader. Lag stems from the fact that oscillators by design are reactive rather than anticipatory. As a result, traders must wait for confirmation; a process that introduces additional lag into the ability to take action. It is now widely accepted that classical oscillators can be very accurate in hindsight but are typically inadequate for forecasting future short-term market direction, in large part due to lag.