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The Predictive Power of “Head-and-Shoulders” Price Patterns in the U.S. Stock Market

The Predictive Power of “Head-and-Shoulders” Price Patterns in the U.S. Stock Market We use the pattern recognition algorithm of Lo, Mamaysky, and Wang (2000) with some modifications to determine whether “head-and-shoulders” (HS) price patterns have predictive power for future stock returns. The modifications include the use of filters based on typical price patterns identified by a technical analyst. With data from the S&P 500 and the Russell 2000 over the period 1990–1999 we find little or no support for the profitability of a stand-alone trading strategy. But we do find strong evidence that the pattern had power to predict excess returns. Risk-adjusted excess returns to a trading strategy conditioned on “head-and-shoulders” price patterns are 5–7% per year. Combining the strategy with the market portfolio produces a significant increase in excess return for a fixed level of risk exposure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Econometrics Oxford University Press

The Predictive Power of “Head-and-Shoulders” Price Patterns in the U.S. Stock Market

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References (33)

Publisher
Oxford University Press
Copyright
Copyright © The Author 2006. Published by Oxford University Press.
Subject
Articles
ISSN
1479-8409
eISSN
1479-8417
DOI
10.1093/jjfinec/nbl012
Publisher site
See Article on Publisher Site

Abstract

We use the pattern recognition algorithm of Lo, Mamaysky, and Wang (2000) with some modifications to determine whether “head-and-shoulders” (HS) price patterns have predictive power for future stock returns. The modifications include the use of filters based on typical price patterns identified by a technical analyst. With data from the S&P 500 and the Russell 2000 over the period 1990–1999 we find little or no support for the profitability of a stand-alone trading strategy. But we do find strong evidence that the pattern had power to predict excess returns. Risk-adjusted excess returns to a trading strategy conditioned on “head-and-shoulders” price patterns are 5–7% per year. Combining the strategy with the market portfolio produces a significant increase in excess return for a fixed level of risk exposure.

Journal

Journal of Financial Econometrics – Oxford University Press

Published: Dec 27, 2007

Keywords: kernel regression stock prices technical analysis

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