The discontinuity phenomenon is the chaotic system that arises after the formation of an original price pattern or trend in the markets. All financial time series depict this. That is, they jump from one pattern to the next and in doing so, the current period of market order comes to an abrupt end.
In “Exploiting stock market cycles” (March 2009), we presented a condensed methodological introduction to algorithms that could be applied to selected financial time series. We defined a universal pattern that emerges and can be detected through the use of an optimized algorithm. We also showed how many economic time series demonstrate this innate property, making so-called random behavior random in name only. The discontinuity phenomenon is an extension of these studies; one of its goals is to identify inverse, sequential patterns to the current market state that render the current pattern obsolete.
If we consider the formation of a pattern as a state of market order, the discontinuity that follows can be viewed best as the chaos and order sequence that links all financial times series. According to Maria Lorca in “The Euro in the 21st Century” (Ashgate, 2011), this continuous jump from one pattern across sequential environments is a “singularity,” which she defines as a spontaneous phenomenon in the economy completely independent of human intervention.
Using traditional technical analysis tools in unique ways, we can uncover these moments of key shifts in the markets. First, however, we need to understand better the market environments that contain these shifts.