The model of Technical Analysis goes against the fulfillment of the weak form of the Hypothesis of Efficient Market raised by Fama (1970). Nevertheless, recently some studies provide evidence with probable prediction of the expected returns based on the past returns. In particular, the investigation of Brock, Lakonishok, and LeBaron (1992) is important because it is one of the few academic investigations that have been able to document a strategy of successful investment based on the Technical Analysis. In the present investigation: The continuation of the past returns in the short term is confirmed. This continuation stays strong statistically at least until the last twelve months, but it is losing force as the terms increase. To the 36 months, certain evidence would exist towards a reversion to the average, but in any case this is extremely weak from a statistical point of view. With respect to the indicators of Technical Analysis, positive but smaller returns compared to those of the indexing are generated. This is due to the incapacity of the Technical Analysis to generate satisfactory results in periods of declining stock markets. More even, the problem of the greater costs of transaction due to the high number of transactions made exists. Therefore, it is not conclusive that the Technical Analysis generates better results than a simple strategy of “to buy and to maintain”. Thus, the investor would be better indexing his portfolio than following the strategies raised by the Technical Analysis.
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Paper provided by EconWPA in its series Finance with number
0402017.