Abstract
This study examines the economic feasibility of technical analysis, such as relative strength index, moving average convergence and divergence in Indian context. Bombay Stock Exchange Sensex Index historical data were collected from BSE data base for the period from February, 2000 to May, 2018. The selected data were further categorised into Bull and Bear markets to test the technical tools performance across market cycle. The results exhibited that relative strength index trading rule failed to deliver the positive return even before deducting transaction cost. However, moving average convergence and divergence trading rules’ sell signal outperformed the unconditional mean return and buy signal mean return, during the Bear market period before deducting transaction cost. However, in accordance with the Sharpe ratio, returns generated were not at the level of risk associated in technical trading rules. The findings question the possibility for traders to consistently earn abnormal return with technical analysis.
Highlights
In investment arena, technical analysis is a separate discipline which attempt to consistently earn abnormal returns by exploiting past price patterns and trading volume of financial assets
The main objective of this study is to examine the profitability of Relative Strength Index (RSI) and Moving Average Convergence and Divergence (MACD) technical trading tools in the Indian stock market
The high value of Kurtosis indicates that the intraday return of Bombay Stock Exchange (BSE) Sensex is not normally distributed and there are outliers
Summary
Technical analysis is a separate discipline which attempt to consistently earn abnormal returns by exploiting past price patterns and trading volume of financial assets. In the world of technical analysis, it is strongly believed that a stock price follows a trend and market participants react in a similar way to the same event in the future. This assumption is valid in the application of technical analysis to predict the future price based on historical price and volume data. Efficient Market Hypothesis (EMH) strongly argues that historical price patterns and volume information are already incorporated in the current security price. The future price of the security follows a random walk and it is almost impossible to be predicted at least in weak-form efficient markets. In finance, the acceptance of EMH and technical trading rules is mutually exclusive (Fama, 1970)
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