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

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  • Gene Savin
  • Paul Weller
  • Jānis Zvingelis

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. Copyright , Oxford University Press.

Suggested Citation

  • Gene Savin & Paul Weller & Jānis Zvingelis, 0. "The Predictive Power of 'Head-and-Shoulders' Price Patterns in the U.S. Stock Market," Journal of Financial Econometrics, Oxford University Press, vol. 5(2), pages 243-265.
    • Handle: RePEc:oup:jfinec:v:5:y::i:2:p:243-265
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbl012
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    Cited by:

    1. Rivera-Castro, Miguel A. & Miranda, José G.V. & Borges, Ernesto P. & Cajueiro, Daniel O. & Andrade, Roberto F.S., 2012. "A top–bottom price approach to understanding financial fluctuations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1489-1496.

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