IS TECHNICAL ANALYSIS PROFITABLE AND CAPABLE FOR STOCK PRICE PREDICTION? EVIDENCE FROM MALAYSIAN STOCK MARKET

Authors

  • Kelvin Lee Yong MIng Faculty of Economics & Business, Universiti Malaysia Sarawak (UNIMAS)
  • Mohamad Jais Faculty of Economics & Business, Universiti Malaysia Sarawak (UNIMAS)
  • Bakri Abdul Karim Faculty of Economics & Business, Universiti Malaysia Sarawak (UNIMAS)

DOI:

https://doi.org/10.33736/uraf.295.2016

Abstract

This study aims to test the ability of technical analysis in predicting the stock price and generating profits. This study employed two of the technical analysis indicators, which are (i) Variable Moving Average (VMA) rules and (ii) Elliot Wave Principle incorporated with Fibonacci numbers. Besides that, this study also examines the relationship between the signals emitted by VMA rules and the stock return by applying Ordinary Least Square (OLS) regression analysis. Among the 42 VMA rules tested, there were only 10 VMA rules shown that the mean returns generated from buy signals are significant higher than the unconditional return. While, the mean returns from sell signals are significant lesser than the unconditional return for all the VMA rules tested. As for Elliot Wave Principle incorporated with Fibonacci numbers indicator, the findings shows that impulsive wave is predictable, meanwhile the corrective wave is less predictable. Lastly, only the signals of 14 VMA rules had shown a significant relationship with the daily stock return. In conclusion, the VMA rules only able to generate profits for certain term of moving average, whereas the Elliot Wave Principle incorporated with Fibonacci numbers tools is useful in predicting the stock market trend.

References

Abbad, J., Fardousi, B., & Abbad, M. (2014). Advantages of using technical analysis to predict future prices on the Amman stock exchange. International Journal of Business and Management, 9(2), 1-16.

https://doi.org/10.5539/ijbm.v9n2p1

Achuthan, S., & Anubhai, R. (2005). Effectiveness of variable length moving average ( VMA ) trading rules in the Indian stock market. Finance India, (4), 1375-1391.

Ahmed, P., Beck, K., & Goldreyer, E. (2000). Can moving average technical trading strategies help in volatile and declining markets ? A study of some emerging Asian markets. Managerial Finance, 26(6), 49-62.

https://doi.org/10.1108/03074350010766747

Alexander, S. S. (1961). Price movements in speculative markets: trends or random walks. Industrial Management Review, 2, 7-26.

Bessembinder, H., & Chan, K. (1995). The profitability of technical trading rules in the Asian stock markets. Pacific-Basin Finance Journal, 3, 257-284.

https://doi.org/10.1016/0927-538X(95)00002-3

Bessembinder, H., & Chan, K. (1998). Market efficiency and the returns to technical analysis. Financial Management, 27(2), 5-17.

https://doi.org/10.2307/3666289

Brock, W., Lakonishok, J., & LeBaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance, 47(5), 1731-1764.

https://doi.org/10.1111/j.1540-6261.1992.tb04681.x

Campbell, H. M. (2011). Simple technical trading rules on the JSE Securities Exchange of South Africa , Part 2. In Proceedings of the World Congress on Engineering (Vol. 1). London.

Charussaengsuriya, R., & Tharnpipat, T. (2012). Technical analysis of stock prices using Elliot wave theory and Fibonacci number. The Empirical Econometrics and Quantitative Economics Letters, 1(1), 91-102.

Chatterjee, A., O. Felix Ayadi, S., & Maniam, B. (2002). The applications of Fibonacci sequence and Elliot Wave Theory in predicting the security price movement: a survey. Journal of Commercial Banking and Finance, 1, 65-76.

Detry, P. J., & Grégoire, P. (2001). Other evidences of the predictive power of technical analysis : the moving averages rules on European indexes. In EFMA 2001 Lugano Meetings (pp. 1-25).

https://doi.org/10.2139/ssrn.269802

Fama, E. F., & Blume, M. E. (1966). Filter Rules and Stock Market Trading. The Journal of Business. 39(1), 226-241.

https://doi.org/10.1086/294849

Frost, A. J., & Prechter, R. R. (2005). Elliot wave principle: key to market behavior. Elliot Wave International.

Garg, M., & Garg, P. (2013). Ratio by Using Coefficients of Fibonacci Sequence. International Journal of Mathematical Combinatorics, 3, 96-103.

https://doi.org/10.5005/jp/books/12108_9

Glezakos, M., & Mylonas, P. (2003). Technical analysis seems to be a valuable investment tool in the Athens and Frankfurt stock exchanges. European Research Studies, VI(1-2), 163-190.

Heng, F. T. K., Azizan, N. A., & Yeap, L. W. (2012). Technical trading systems as crystal balls in reducing risk: the Malaysian stock market. International Business Management, 6(2), 140-146. doi:10.3923/ibm.2012.140.146

https://doi.org/10.3923/ibm.2012.140.146

Hudson, R., Dempsey, M., & Keasey, K. (1996). A note on the weak form efficiency of capital markets: The application of simple technical trading rules to UK stock prices - 1935 to 1994. Journal of Banking and Finance, 20, 1121-1132.

https://doi.org/10.1016/0378-4266(95)00043-7

Hung, N. H., & Zhaojun, Y. (2013). Profitability of applying simple moving average trading rules for the Vietnamese stock market. Journal of Business & Management, 2(3), 22-31.

https://doi.org/10.12735/jbm.v2i3p22

Isakov, D., & Hollistein, M. (1999). Application of simple technical trading rules to Swiss stock prices: Is it profitable ? Financial Markets and Portfolio Management, 13(1), 9-26.

https://doi.org/10.2139/ssrn.904366

James, F. E. (1968). Monthly moving averages-an effective investment tool? Journal of Financial and Quantitative Analysis, 3(3), 315-326.

https://doi.org/10.2307/2329816

Lai, M. M., Balachandler, K. G., & Nor, F. mat. (2007). An examination of the random walk model and technical trading rules in the Malaysian stock market. Malaysian Accounting Review, 6(2), 99-121.

Lam, K. S. K., Yeung, H. F., & Cheung, W. (2007). The profitability of simple technical trading strategies: the case of Hong Kong. In 20th Australasian Finance & Banking Conference.

https://doi.org/10.2139/ssrn.1008740

Lebaron, B. (2000). The stability of moving average technical trading rules on the Dow Jones Index. Derivatives Use, Trading and Regulation, 5(4), 324-338.

Lubnau, T., & Todorova, N. (2014). Technical trading revisited: evidence from the asian stock markets. Corporate Ownership & Control, 11(2), 511-532.

https://doi.org/10.22495/cocv11i2c5p6

McKenzie, M. D. (2007). Technical trading rules in emerging markets and the 1997 Asian Currency Crises. Emerging Markets Finance and Trade, 43(4), 46-73.

https://doi.org/10.2753/REE1540-496X430403

Mills, T. C. (1997). Technical analysis and the London Stock Exchange : Testing trading rules using the FT30. International Journal of Finance & Economics, 2, 319-331.

https://doi.org/10.1002/(SICI)1099-1158(199710)2:4<319::AID-JFE53>3.0.CO;2-6

Muhannad A. Atmeh, & Ian M. Dobbs. (2006). Technical analysis and the stochastic properties of the Jordanian stock market index return. Studies in Economics and Finance, 23(2), 119-140.

https://doi.org/10.1108/10867370610683914

Nison, S. (2001). Japanese candlestick charting techniques: a contemporary guide to the ancient investment techniques of the Far East. Penguin.

Ratner, M., & Leal, R. (1999). Tests of technical trading strategies in the emerging equity markets of Latin America and Asia. Journal of Banking & Finance, 23, 1887-1905.

https://doi.org/10.1016/S0378-4266(99)00042-4

Ready, M. J. (2002). Profits from technical trading rules. Financial Management, 31(3), 43-61.

https://doi.org/10.2307/3666314

Zhu, Y., & Zhou, G. (2009). Technical analysis : An asset allocation perspective on the use of moving averages. Journal of Financial Economics, 92, 519-544.

https://doi.org/10.1016/j.jfineco.2008.07.002

Downloads

Published

2016-08-01

How to Cite

MIng, K. L. Y., Jais, M., & Karim, B. A. (2016). IS TECHNICAL ANALYSIS PROFITABLE AND CAPABLE FOR STOCK PRICE PREDICTION? EVIDENCE FROM MALAYSIAN STOCK MARKET. UNIMAS Review of Accounting and Finance, 1(1). https://doi.org/10.33736/uraf.295.2016