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The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics

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  • Stephan Schulmeister

Abstract

This study analyses the interaction between the aggregate trading behaviour of technical models and stock price fluctuations in the S&P 500 futures market. It examines 2,580 widely used trading systems based on 30-minutes prices. The sample comprises trend-following as well as contrarian models. It shows that technical trading exerts an excess demand pressure on the stock market. This is because technical models produce clusters of trading signals that are on the same side of the market, either buying or selling. Initial stock price changes triggered by news are strengthened by a sequence of trading signals produced by trend-following models. Once 90 percent of the models have signalled a particular position, stock prices tend to move in the direction congruent with the position-holding of the models. This phenomenon has to be attributed to the transactions of non-technical traders, perhaps amateurs. Once price movements lose their momentum, contrarian technical models contribute to reversals of the trend.

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  • Stephan Schulmeister, 2007. "The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics," WIFO Working Papers 290, WIFO.
    • Handle: RePEc:wfo:wpaper:y:2007:i:290
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    Cited by:

    1. Stephan Schulmeister, 2009. "Trading Practices and Price Dynamics in Commodity Markets and the Stabilising Effects of a Transaction Tax," WIFO Studies, WIFO, number 34919, February.
    2. Hung, Kuo-Che & Ma, Tai, 2017. "Does monetary policy have any relationship with the expectations of stock market participants?," Journal of Multinational Financial Management, Elsevier, vol. 39(C), pages 100-117.
    3. Stephan Schulmeister, 2012. "Technical Trading and Commodity Price Fluctuations," WIFO Studies, WIFO, number 45238, February.
    4. Schulmeister, Stephan, 2009. "Profitability of technical stock trading: Has it moved from daily to intraday data?," Review of Financial Economics, Elsevier, vol. 18(4), pages 190-201, October.
    5. Menkhoff, Lukas, 2010. "The use of technical analysis by fund managers: International evidence," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2573-2586, November.
    6. Schulmeister, Stephan, 2009. "Aggregate trading behaviour of technical models and the yen/dollar exchange rate 1976-2007," Japan and the World Economy, Elsevier, vol. 21(3), pages 270-279, August.
    7. Stephan Schulmeister & Margit Schratzenstaller & Oliver Picek, 2008. "A General Financial Transaction Tax. Motives, Revenues, Feasibility and Effects," WIFO Studies, WIFO, number 31819, February.

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    Keywords

    Technical trading; stock price dynamics; momentum effect; reversal effect;
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