The results of this thesis are built upon a foundation and theoretical discussion of the proponents of technical analysis on one side and modern financial theory on the other side. Among others things, the proponents of technical analysis rely on behavioral finance and a momentum effect in validating the usefulness of technical analysis. On the other hand, modern financial theory discredits technical analysis from having any predictive power in forecasting future stock returns referring to models such as the efficient market hypothesis and the random walk hypothesis. This thesis investigates the circumstances of technical analysis, and more specifically, a series of technical indicators. The paper conducts an empirical analysis of 713 technical indicators from five different categories and back tests them on the American stock index Standard & Poor’s 500 over the past 61 years from July 1954 to June 2015. The five categories of technical indicators are moving averages, support and resistance, channels, bollinger bands, and on balance volume. In the thesis the test period, in which the performance of the technical indicators is analyzed, is divided into three sub periods each of 17 years of length as well as an out-of-sample period of ten years from 2005 to 2015. The results from the analysis support the use of a number of the technical indicators during the first two sub periods in which they highly outperformed the passive benchmark investment in the stock index. A large fraction of the best performing indicators during the first sub period reappear during the second sub period. During the third sub period drastic reductions are observed in the results produced by the best technical indicators compared to the first two sub periods, and the results are only a marginal improvement over the benchmark. Interestingly, none of the best performing indicators during either of the first two sub periods continues to outperform benchmark and deliver abnormal returns during the third sub period. The out-of-sample experiment shows similar results as the third sub period. Once again the results are only a minor improvement over the benchmark, and none of the previously best performing indicators in either of the sub periods are among the top indicators in the out-of-sample period. In fact, some of the best performing indicators that generated extraordinary returns during the first two sub periods are among some of the worst performing indicators during the out-of-sample experiment. The results indicate that after the end of the second sub period it would have been difficult for an investor to predict and choose which indicator would be most likely to produce the highest returns in the future based on the historic performance of the technical indicators. Based on the findings in the analysis the results lead the author to the conclusion that it appears that the efficiency of the market has improved in recent times, and that it is unlikely that the extraordinary returns, that some of the indicators generated during the first two sub periods, will be produced by technical indicators in the future.
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