Darren Winters

A bull market, also known as a bull run, is one in which shares are generally rising in price. The investors are generally optimistic and keen to buy, thereby driving prices up further. A good example is the U.S. stock market in the early nineties, when all the stock market indices such as the Dow Jones rose almost continually. A bear market, on the other hand, is one where share prices are falling due to investor pessimism. The most famous bear market was the Wall Street Crash that started in October 1929.

This is another one of those “Looks a bit like what it means” terms. In this case, the price in shares dips in a gradual U shape and then picks up, followed by a slight drop marking the handle of the cup, and then a further climb. The peak between the cup and the handle occurs when the stock approaches the peak price on the initial side of the cup. Investors aren’t keen to test the stock price beyond that value, so the price holds steady (we say it “trades sideways”) with a slight downward trend – the handle of the cup.

The bounces that happen when shares reach their support or resistance levels tend to be repeated, that is, when a share falls to a support level, it may well bounce repeatedly off that level, and similarly for rising to a resistance level. However, shares can break through their support or resistance levels, referred to as a price breakout. Once a share has broken out, its tendency is to keep on moving.

Resistance is a mirror image to support for a share price. In this case, a share price is rising and reaches a level at which investors won’t sustain it any further and the price falls back. It is as though the share price has bounced off a glass ceiling. Having fallen back slightly, it may climb again and even bounce back at the same price. We say that investors are providing resistance at that price. Resistance levels indicate the level at which sellers generally outnumber buyers.

Share prices rise and fall depending on, amongst other things, investor confidence. When shares are falling, they may reach a level where investors start to buy, perhaps feeling that the shares are now a “bargain”. The price would then rally slightly. Effectively, the share price has “bounced” off a minimum value. The rally in the share price may be temporary – it may start to fall again, and even bounce when it reaches roughly the same price. We say that investors are providing support for the shares at that price. Support levels indicate the price at which most investors believe the price will rise.

Technical Analysts (sometimes called “Technicians”) try to spot trends in share prices as they are continually changing, and have developed a vocabulary of technical terms to describe that behaviour. A lot of them, such as moving average or linear regression, are simply standard statistical methods that have been pressed into service to remove the random variation from the share price. Detailed descriptions of these can be found in any statistics text book, and there are many online tutorials that will explain them. Others describe the overall shape of the share-price graph in easy-to-understand terms, such as “cup and handle”, “head and shoulders” etc.

No-one knows exactly how many organisations and individuals use ANNs to predict stock market prices as people tend to be secretive about their methods. One of the postulates of the Efficient Market Hypothesis is that information flows efficiently round stock markets and so any ANN that had a high success rate would, if made public knowledge, be quickly adopted by others. Essentially, this begs the question: Why spoil a good thing by making it generally available?

So perhaps the perfect neural network, that can predict every twist and turn in the market, is out there. If so, the chances are that you and I will never get to hear about it!