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Empirical tests, including serial correlation, runs tests, and filter-rule strategies, assess whether patterns can be exploited after costs.",{"@graph":14,"@context":72},[15,34,55],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/template/","Template",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/template/presentations/","Presentations",3,{"item":32,"name":10,"@type":21,"position":33},"https://docshare.wps.com/template/smoke-and-mirrors-price-patterns-charts-and-technical-analysis/571274/",4,{"url":32,"name":10,"@type":35,"image":36,"author":41,"headline":10,"publisher":44,"fileFormat":47,"inLanguage":8,"description":12,"dateModified":48,"datePublished":49,"encodingFormat":47,"isAccessibleForFree":50,"interactionStatistic":51},"DigitalDocument",{"url":37,"@type":38,"width":39,"height":40},"https://docshare.wps.com/thumbnails/smoke-and-mirrors-price-patterns-charts-and-technical-analysis/571274.png","ImageObject",442,249,{"name":42,"@type":43},"Kyle","Person",{"url":19,"name":45,"@type":46},"DocShare","Organization","application/pdf","2026-10-25","2026-10-13",true,{"@type":52,"interactionType":53,"userInteractionCount":30},"InteractionCounter",{"@type":54},"ViewAction",{"@type":56,"mainEntity":57},"FAQPage",[58,64,68],{"name":59,"@type":60,"acceptedAnswer":61},"How does the Random Walk Hypothesis connect information, expectations, and stock prices?","Question",{"text":62,"@type":63},"Investors form unbiased expectations about the future, and the stock price is an unbiased estimate of value. When news arrives, the price moves up or down relative to expectations, with equal probability of good or bad news.","Answer",{"name":65,"@type":60,"acceptedAnswer":66},"Why might price patterns still appear even if assets are not reliably mispriced?",{"text":67,"@type":63},"Investors may set expectations irrationally, leading to assets being under- or overestimated at different times. Price changes themselves may also provide information, making it more likely that recent trends continue or reverse.",{"name":69,"@type":60,"acceptedAnswer":70},"Which methods are used to test for price patterns, and what do they measure?",{"text":71,"@type":63},"The document lists serial correlation (dependence between consecutive price changes), runs tests (whether sequences of up/down periods match randomness), and filter rules/relative strength (whether strategies based on past performance beat the market).","https://schema.org",{"og:url":32,"og:type":74,"og:title":10,"og:site_name":45,"og:description":12},"article",{"robots":76,"canonical":32},"index,follow",{"doc_id":78,"site_id":7},571274,1792316286,{"code":4,"msg":81,"data":82},"success",[83,87,92,97,102,107,112,117,122],{"id":84,"doc_module":22,"doc_module_name":25,"category_name":29,"show_sort_weight":85,"slug":86},11,90,"presentations",{"id":88,"doc_module":22,"doc_module_name":25,"category_name":89,"show_sort_weight":90,"slug":91},12,"Resumes",80,"resumes",{"id":93,"doc_module":22,"doc_module_name":25,"category_name":94,"show_sort_weight":95,"slug":96},14,"Invoices",70,"invoices",{"id":98,"doc_module":22,"doc_module_name":25,"category_name":99,"show_sort_weight":100,"slug":101},15,"Posters",60,"posters",{"id":103,"doc_module":22,"doc_module_name":25,"category_name":104,"show_sort_weight":105,"slug":106},16,"Social Media",50,"social-media",{"id":108,"doc_module":22,"doc_module_name":25,"category_name":109,"show_sort_weight":110,"slug":111},17,"Forms",40,"forms",{"id":113,"doc_module":22,"doc_module_name":25,"category_name":114,"show_sort_weight":115,"slug":116},18,"Letters",30,"letters",{"id":118,"doc_module":22,"doc_module_name":25,"category_name":119,"show_sort_weight":120,"slug":121},21,"Paper Templates",5,"papers-templates",{"id":123,"doc_module":22,"doc_module_name":25,"category_name":124,"show_sort_weight":4,"slug":125},158,"General","general-158",{"code":4,"msg":81,"data":127},{"doc_id":78,"user_id":128,"nickname":42,"user_avatar":129,"doc_module":22,"category_id":84,"category_name":29,"doc_title":10,"doc_description":12,"doc_content":130,"file_id":131,"file_url":132,"file_type":133,"file_size":134,"view_count":30,"is_deleted":4,"is_public":22,"is_downloadable":22,"audit_status":22,"page_count":135,"language":136,"language_code":8,"site_id":7,"html_lang":8,"table_of_contents":137,"faqs":138,"seo_title":139,"seo_description":12,"update_tm":140,"read_time":141},3985741905716,"https://ap-avatar.wpscdn.com/davatar_994ba38a5ba835b3df7d355c54d3ed8d","Smoke and Mirrors: Price patterns, charts and technical analysis  \nAswath Damodaran  \nAswath Damodaran  \n1  \nThe Random Walk Hypothesis  \nAswath Damodaran  \nInformation  \nMarket  \nExpectations  \nPrice  \nAssessment  \nImplications for Investors  \nAll information about the firm is publicly available and traded on.  \nNew information comes out about the firm.  \n\n|  |\n| --- |\n|  |\n\nCurrent Next period  \nInvestors form unbiased expectations about the future  \nStock price is an unbiased estimate of the value of the stock.  \nNo approach or model will allow us to identify under or over valued assets.  \nSince expectations are unbiased, there is a 50% chance of good or bad news.  \nThe price changes in accordance with the information. If it contains good (bad) news, relative to expectations, the stock price will increase (decrease) .  \nReflecting the 50/50 chance of the news being good or bad, there is an equal probability of a price increase and a price decrease.  \n2  \nThe Basis for Price Patterns  \n1. Investors are not always rational in the way they set expectations . These irrationalities may lead to expectations being set too low for some assets at some times and too high for other assets at other times . Thus, the next piece of information is more likely to contain good news for the first asset and bad news for the second.  \n2. Price changes themselves may provide information to markets. Thus, the fact that a stock has gone up strongly the last four days may be viewed as good news by investors, making it more likely that the price will go up today then down .  \nAswath Damodaran 3  \nThe Empirical Evidence on Price Patterns  \n􀀡 Investors have used price charts and price patterns as tools for predicting future price movements for as long as there have been financial markets .  \n􀀡 The first studies of market efficiency focused on the relationship between price changes over time , to see if in fact such predictions were feasible .  \n􀀡 Evidence can be classified into three classes  \n• Studies that looks at the really short term (hourly, daily) price behavior  \n• studies that focus on short-term (weekly, monthly price movements) price behavior and  \nresearch that examines long-term (annual and five-year returns) price movements .  \nAswath Damodaran 4  \nTesting for price patterns  \n􀀡 Serial correlation, where you look at how price changes in a period are correlated with price changes in prior periods  \n􀀡 Runs tests, where you look at sequences of “up” or “down” periods and test them against randomness .  \n􀀡 Filter rules and relative strength, where you examine whether investment strategies based upon past price performance beat the market.  \nAswath Damodaran 5  \nSerial correlation  \n􀀡 Serial correlation measures the correlation between price changes in consecutive time periods  \n􀀡 Measure of how much price change in any period depends upon price change over prior time period.  \n0: imply that price changes in consecutive time periods are uncorrelated with each other  \n>0: evidence of price momentum in markets \u003C0: Evidence of price reversals  \nAswath Damodaran 6  \nSerial Correlation and Excess Returns  \n􀀡 From viewpoint of investment strategy, serial correlations can be exploited to earn excess returns .  \n• A positive serial correlation would be exploited by a strategy of buying after periods with positive returns and selling after periods with negative returns .  \n• A negative serial correlation would suggest a strategy of buying after periods with negative returns and selling after periods with positive returns .  \n• The correlations must be large enough for investors to generate profits to cover transactions costs.  \nAswath Damodaran 7  \n1. Serial Correlation in really short-term returns  \n􀀡 Low or no serial correlation: The earliest studies of serial correlation all looked at large U.S. stocks and concluded that the serial correlation in stock prices was small. Other studies confirmed these findings – of very low correlation, positive or negative-","cbCaig7o9sxXZQoL","https://ap.wps.com/l/cbCaig7o9sxXZQoL","pdf",3114152,64,"English","# The Random Walk Hypothesis\n## Information, expectations, and stock price assessment\n# The Basis for Price Patterns\n## Irrational expectations and asymmetric news\n## Price changes as informational signals\n# The Empirical Evidence on Price Patterns\n## Classes of evidence by time horizon\n# Testing for price patterns\n## Serial correlation\n## Runs tests\n## Filter rules and relative strength\n# Serial Correlation and Excess Returns\n## Short-term returns and market frictions\n# Returns on Filter Rule Strategies","[{\"question\":\"How does the Random Walk Hypothesis connect information, expectations, and stock prices?\",\"answer\":\"Investors form unbiased expectations about the future, and the stock price is an unbiased estimate of value. When news arrives, the price moves up or down relative to expectations, with equal probability of good or bad news.\"},{\"question\":\"Why might price patterns still appear even if assets are not reliably mispriced?\",\"answer\":\"Investors may set expectations irrationally, leading to assets being under- or overestimated at different times. Price changes themselves may also provide information, making it more likely that recent trends continue or reverse.\"},{\"question\":\"Which methods are used to test for price patterns, and what do they measure?\",\"answer\":\"The document lists serial correlation (dependence between consecutive price changes), runs tests (whether sequences of up/down periods match randomness), and filter rules/relative strength (whether strategies based on past performance beat the market).\"}]","Smoke and Mirrors - Price patterns, charts and technical analysis | PDF",1791910654,22]