An Evaluation Of The Performance Of Moving Average And Trading Volume Technical Indicators In The U.S. Equity Market

Abstract

This paper examines the profitability of several simple technical trading rules by using the S&P 500 index. The purpose of this research is to test the assumption that markets are efficient and therefore do not allow for the exploitation of predictable price patterns. Returns generated from using the trading rules in the market are compared to returns from a buy-and-hold investing strategy to determine the success of technical indicators. Further investigation into technical analysis is done through several regression models in an attempt to capture the “true” model of the market. The models give insight into why the trading rules may work. Results from the regression models are compared to the returns generated by the trading rules to examine whether the models chosen are a good representation of the dynamics that are happening in the market. The results present evidence that the trading rules do consistently generate excess returns over the buy-and-hold method of investing. This suggests that the movements of the market may not be an unpredictable random walk, but rather can be captured by an autoregressive econometric model.