Forecasting US Stock Market Returns: A Japanese Candlestick Approach

Abstract

A Japanese candlestick chart consists of not only the closing price but also the high, low and opening price information. Using the Japanese candlestick, this paper investigates the forecasting power of the shadow in Japanese candlestick chart. Empirical studies performed with the US stock market show that 1) there is a significant Halloween effect in the shadow; 2) shadow is valuable for predicting the stock market returns in both statistical and economic sense; 3) the predictability reported by the shadow can not be explained by either the CAPM model or the Fama-French three-factor model. This paper confirms that predictability of the stock market can be improved if more price information is used.