Technical Analysis and Efficient Market Hypothesis Analysis Report

This report delves into the concepts of technical analysis and the efficient market hypothesis (EMH), exploring how financial analysts utilize tools like charts and trendline analysis to predict market movements. It examines the EMH's role in assessing market efficiency and how various factors, including company news and economic indicators, influence share prices. The report discusses market anomalies, categorized as fundamental, technical, and seasonal, and how investors employ EMH techniques to forecast price changes. It further analyzes the impact of political changes, financial disclosures, and behavioral factors on investment decisions. The report highlights the limitations of technical analysis in certain market forms and emphasizes the importance of understanding market dynamics for effective investment strategies, referencing various academic sources.

TECHNICAL ANALYSIS AND
EFFICIENCY MARKET
HYPOTHESIS

TABLE OF CONTENTS
`Technical analysis, the prediction of price movements based on past price movements, has been
shown to generate statistically significant profits despite its incompatibility with most
economists’ notions of efficient markets”.’.....................................................................................1
REFERENCES................................................................................................................................6

`Technical analysis, the prediction of price movements based on past price
movements, has been shown to generate statistically significant profits
despite its incompatibility with most economists’ notions of efficient
markets”.’
To predict the growth and fall of the market trend on which financialist uses various tools
and measures to have comparatively accurate prediction based on price movement through past
records. These are the techniques which enables them in predicting the growth and fall of the
market share and analysing the efficiency of the market in the upcoming period. These prediction
on the other hand will be effective in terms of investment decisions which is collectively based
on development of economy, domestic production as well as fundamental analysis.
In the technical analysis, on which financial analysts predicts movement of share price in the
upcoming period with the help of tools such as charts, Trendline analysis etc. These graphical
presentations are beneficiary in terms of analyzing the direction of trend whether upward or
downward (Technical Analysis, 2018). Therefore, the specialist in market prediction who have
better experience will predict that the market will be profitable in the next period or it may fall.
Along with this, there have been various other techniques which are being useful in respect with
predicting the market efficiency.
Share prices and market index will vary on the basis of various non-fundamental or non-
technical factors such as news regarding company’s scam, frauds as well as insolvency are the
main reasons on which there will be impacts of external factors which creates insecurity among
the investors in investing activities (de Souza and et.al., 2018). It impacts on movement of share
price index in a market (Arthur, 2018). Due to such impacts the prediction and forecasting of the
share prices will not being effective by financial analysts as per influences of various measures
will affect pricing of shares.
In efficiency market hypothesis on which financialists traces the past records of price
movement in a security market on which the efficiency of market to contribute in single as well
as multi liner asset prices have been tested (Alhashel, Almudhaf and Hansz, 2018). There has
been testing on the empirical regularities and anomalies in the stocks, bonds, currency as well as
commodity in the market. Efficient market hypothesis is one of the important paradigms of
traditional finance theories. Fama (1970) defined efficient market as a market as a market with
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large numbers of rational profit maximizing individuals actively competing with each other and
doing attempts to predict future market values of individual securities, and where all important
relevant information is almost freely available to all investors.
Financial market anomalies in scientific analysis is termed as unusual or strange occurrence
in a condition. There have been irregularity and deviation from natural, common or exceptional
conditions (Fernando and Gunasekara, 2018). However, it has been applicable in the
fundamental novelty of facts, surprises which are in regards to theory, hypothesis and models.
Moreover, in this case a researcher or a predictor uses hypothesis for examining the relationship
and differences between the variables (Jovanovic, 2018). There have been three kinds of
anomalies which are being presented in Anomalies such as fundamental, technical and seasonal
or calendar.
In the current market scenario, the EMH technique have been used by investors in count
with predicting the changes in market price of the securities in the coming period (Basak and
et.al., 2019). However, this will be helpful in terms of bringing the consistence dominance in the
market as well as a constant positive feedback on reliability of the outcomes. Thus, the accuracy
of the data base in this traditional aspect is more relivable and accurate in terms of investment
decisions.
Along with this, it can be said that, statistically measuring the changes of the security prices
are the main concerns which in turn will be applicable and helpful to have better observation of
analysis. Use of various mathematical techniques and tools will be adequate with reference to
have effective management of operational analysis (Palao and Pardo, 2018). There have been
influences of mathematical algorithms which will be effective and analyzing the outcomes and
making proper analysis on the past and present prices. Graphical presentation of the data set will
be effective with respect to measure the outcomes as well as indicating the rise and fall of the
prices (Tirkaso and Hess, 2018). Investors will analyze the upcoming performance the security
market on which they will estimate the profitability of their investment which are going to be
made by them in any capital asset.
Technically predicting fluctuations in security market will be accurate but there have been
impacts of various alternatives factors which in turn would affect the performance of business
(Lehoczky and Schervish, 2018). Additionally, there have been impacts of issues which are
impacting on the equity collection in an organization the past crisis which have been affecting
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dissatisfaction among people on which it affects the shareholder’s interest in the business (Chen,
Zhou and Wang, 2018). Thus, used to take out their money and stop investing in the business.
Along with this, changes in the political aspects of any nation such as variations in the policies
for taxation, interest rate analysis as well as strength of market which will be impacting on
upward and declining phase security index (de Souza and et.al., 2018).
If the financial disclosure of financial performance of business is not appropriate and does
not reflect any clarity which indicates that they must be some sort of misrepresentation.
However, such outcomes will affect the business in relation with attaining the profitable targets
at the right time (Arthur, 2018). Moreover, the disclosure reflects over all performance of the
industry in the financial years on which the amount of revenue and expenses recorded in the
accounts have been analyzed, summarized and disclosed among environment impacts of higher
expenses will reduce the interest of shareholders in the business as they will be insecure about
their investment in firm (Alhashel, Almudhaf and Hansz, 2018). Ultimately such variation will
affect the reducing in the number of equity funding in the business and that can affect the earning
per share (EPS) rate of business.
The variation in the exchange rates, interest rates as well as currency value of an economy in
compared with he global market will also affect investments made in a company. Therefore,
there can be impacts of changes incurred in the operational efficiency and activities performed
by an organization with the motive of making qualitative efforts to retain the gains (Fernando
and Gunasekara, 2018). It includes analyzing their moving average and trading range break as
per technical anomalies in the EMH techniques. The main motive of an investor is for getting the
more profitable returns on the level of capital invested by them in the company (Jovanovic,
2018). They took a share in the company’s ownership on which the proportionate amount of
funds is required to be retained by them. Investment security are required to be given by the
professionals of the organization among investors which in turn will be valuable to bring better
marketable returns to business.
Changes incurred in laws, regulations and taxes will affect the overseas investment in a
particular nation. Every economy is based on making policies and strategies to improve its
economy with compared to the global economy (Basak and et.al., 2019). Thus, in the run of
becoming economically successful on which economists and governmental bodies make various
changes in the operations. Moreover, this can be a non-fundamental aspect which in turn will
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affect the security market as well as the prices of securities. There can be failure of various
anomalies which in turn would affect the business growth and profitability which would
psychologically impacting the investors top change their decision regarding investments (Palao
and Pardo, 2018).
In relation with the behavioural causes which affects the financial market that could
indicate overreaction and under reaction fluctuations. There are mainly influences of the
psychological reasons which in turn would have impacts on the level of investment gathered by
an organisation (Tirkaso and Hess, 2018). Investors reacts to the prior information or the past
fluctuations incurred in the prices of the capital assets. It has been determined by the investors
that the past fluctuation such as raise or fall incurred in the prices would be repeat again. Thus,
they predict the changes accordingly (Lehoczky and Schervish, 2018). It has been approached by
investors in terms of maintaining the equilibrium in the long run. The presence of the positive
autocorrelation. Though, they further argued, the prices would come to the equilibrium in long
run but this behavior causes the positive autocorrelation in the short run and thus the momentum
effect in the short run as well as the contrarian effect in the long run as the in the long run the
autocorrelation goes negative (Chen, Zhou and Wang, 2018).
Efficient market hypothesis is that where investors were well informed regarding the stock
exchange as well as various actions are to be taken accordingly. Investors can become able to
beat the market as per the gathering the abnormal returns which will weak the efficiency of the
market (de Souza and et.al., 2018). There can eb negative impacts over the technical analysis
which is useless with reference to semi strong, strong and weak financial market. In the weak
form of efficient market technical analysis is useless, while in semi strong form, both the
technical and fundamental analysis is of no use (Arthur, 2018). And in strong form of efficient
market even the insider trader cannot get abnormal return. But it is found in many stock
exchanges of the world that these markets are not following the rules of EMH. The functioning
of these stock markets deviates from the rules of EMH (Alhashel, Almudhaf and Hansz, 2018).
These deviations are called anomalies. Anomalies could occur once and disappear or could occur
repeatedly. From the study of anomalies, we can conclude that investor can beat the market, and
can generate abnormal returns by fundamental, technical analysis, by analyzing the past
performance of stocks and by insider trading (Fernando and Gunasekara, 2018).
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Technical analysis will be effective in bringing the accurate outcomes regarding the changes
which are to be made in the share prices as well as defining the efficiency of the market in the
upcoming period (Jovanovic, 2018). But, considering the other factors such as behaviours,
fluctuation in the governmental policies as well as determining the changes incurred in the
operational validity will be effective to address the outcomes. Moreover, the psychological
factors affect the decisions making regarding the investment in an industry by the investors
which would bring them in dilemma with reference to make investments as well as effective
portfolio management (Basak and et.al., 2019).
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REFERENCES
Books and Journals
Alhashel, B. S., Almudhaf, F. W. and Hansz, J. A., 2018. Can technical analysis generate
superior returns in securitized property markets? Evidence from East Asia
markets. Pacific-Basin Finance Journal. 47. pp.92-108.
Arthur, W. B., 2018. Asset pricing under endogenous expectations in an artificial stock market.
In The economy as an evolving complex system II (pp. 31-60). CRC Press.
Basak, S. and et.al., 2019. Predicting the direction of stock market prices using tree-based
classifiers. The North American Journal of Economics and Finance. 47. pp.552-567.
Chen, J. C., Zhou, Y. and Wang, X., 2018. Profitability of simple stationary technical trading
rules with high-frequency data of Chinese Index Futures. Physica A: Statistical
Mechanics and its Applications. 492. pp.1664-1678.
de Souza, M. J. S. and et.al., 2018. Examination of the profitability of technical analysis based on
moving average strategies in BRICS. Financial Innovation. 4(1). p.3.
Fernando, P. N. D. and Gunasekara, A. L., 2018. Is the Market Efficiency Static or Dynamic–
Evidence from Colombo Stock Exchange (CSE). Kelaniya Journal of Management. 7(1).
Jovanovic, F., 2018. A comparison between qualitative and quantitative histories: the example of
the efficient market hypothesis. Journal of Economic Methodology. 25(4). pp.291-310.
Lehoczky, J. and Schervish, M., 2018. Overview and History of Statistics for Equity
Markets. Annual Review of Statistics and Its Application. 5. pp.265-288.
Palao, F. and Pardo, A., 2018. Do price barriers exist in the European carbon market?. Journal of
Behavioral Finance. 19(1). pp.111-124.
Tirkaso, W. and Hess, S., 2018. Does commercialisation drive technical efficiency
improvements in Ethiopian subsistence agriculture?. African Journal of Agricultural and
Resource Economics. 13(311-2018-2942).
Online
Technical Analysis. 2018. [Online]. Available through :<
http://www.dolefin.com/technicalanalysis/?navanchor=2110002>.
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