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Technical analysis as a sentiment barometer and the cross-section of stock returns

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  • Wenjie Ding
  • Khelifa Mazouz
  • Owain ap Gwilym
  • Qingwei Wang

Abstract

This paper explores an unexamined sentiment channel through which technical analysis can add value. We use a spectrum of technical trading strategies to build a daily market sentiment indicator that is highly correlated with other commonly used sentiment measures. This technical-analysis-based sentiment indicator positively predicts near-term returns and is inversely related to long-term returns in the cross-section. Simple trading strategies based on this sentiment indicator yield substantial abnormal returns. These results are consistent with the explanation that lack of synchronization induces rational arbitrageurs to exploit the mispricing before it is corrected.

Suggested Citation

  • Wenjie Ding & Khelifa Mazouz & Owain ap Gwilym & Qingwei Wang, 2023. "Technical analysis as a sentiment barometer and the cross-section of stock returns," Quantitative Finance, Taylor & Francis Journals, vol. 23(11), pages 1617-1636, November.
    • Handle: RePEc:taf:quantf:v:23:y:2023:i:11:p:1617-1636
    DOI: 10.1080/14697688.2023.2244991
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