Technical Analysis of Financial Markets: A Critical Study
Cox, Colin A.
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The effectiveness of technical analysis has been debated by investors for years. This paper provides an overview of the history of technical analysis and details the more common techniques used in technical analysis. The relationship between technical analysis and fundamental analysis is discussed as well as how both methods of analysis are reconciled with the efficient market hypothesis. After introducing the more common tools of technical analysis, several of these are applied to Standard & Poor's (S&P) 500 index covering the last ten years. Several technical analysis techniques outperform a buy and hold strategy by significant margins. Among the methods used to analyze the S&P index are a 150-day moving average, the behavior of average bond yields, the Barron's Confidence Index, and short interest ratios. The returns provided from each method were calculated and adjusted to annual compound rates of return. All methods were examined from 7/1/83 to 6/30/93, and compared to a buy and hold strategy over the same period.