Eur. Phys. J. B 14, 579-601 (2000)
https://doi.org/10.1007/s100510051067

Fundamental framework for "technical analysis" of market prices

¹ Nordic Institute for Theoretical Physics, Blegdamsvej 17, 2100 Copenhagen, Denmark
² Laboratoire de Physique de la Matière Condensée (CNRS UMR 6622) and Université de Nice-Sophia Antipolis, BP 71, Parc Valrose, 06108 Nice Cedex 2, France
³ Institute of Geophysics and Planetary Physics and Department of Earth and Space Sciences, University of California, Los Angeles, California 90095, USA

Received: 3 October 1999
Published online: 15 April 2000

Abstract

Starting from the characterization of the past time evolution of market prices in terms of two fundamental indicators, price velocity and price acceleration, we construct a general classification of the possible patterns characterizing the deviation or defects from the random walk market state and its time-translational invariant properties. The classification relies on two dimensionless parameters, the Froude number characterizing the relative strength of the acceleration with respect to the velocity and the time horizon forecast dimensionalized to the training period. Trend-following and contrarian patterns are found to coexist and depend on the dimensionless time horizon. The classification is based on the symmetry requirements of invariance with respect to change of price units and of functional scale-invariance in the space of scenarii. This "renormalized scenario" approach is fundamentally probabilistic in nature and exemplifies the view that multiple competing scenarii have to be taken into account for the same past history. Empirical tests are performed on about nine to thirty years of daily returns of twelve data sets comprising some major indices (Dow Jones, SP500, Nasdaq, DAX, FTSE, Nikkei), some major bonds (JGB, TYX) and some major currencies against the US dollar (GBP, CHF, DEM, JPY). Our "renormalized scenario"exhibits statistically significant predictive power in essentially all market phases. In contrast, a trend following strategy and trend + acceleration following strategy perform well only on different and specific market phases. The value of the "renormalized scenario" approach lies in the fact that it always selects the best of the two, based on a calculation of the stability of their predicted market trajectories.