Study Design:
Data: 1,050 companies across 21 countries
Period: 2010 (non-declining trend) and 2011 (bear market)
Indicators: SMA5/10/15, WMA5/10/15
Strategies: Long (buy), Short (short-sell), Long-Short combination
Key Findings:
Long Strategy: All SMA-based long trades produced negative returns (-5.37% to -11.15%)
Short Strategy: All SMA-based short trades generated positive returns (+7.79% to +9.61%)
Long-Short Strategy: SMA5-based Long-Short strategy achieved the highest return (+19.16%)
All technical analysis strategies outperformed the Buy & Hold strategy
Opinion
This study provides valuable insight into the importance of adjusting investment strategies based on market conditions. The finding that short-term strategies are effective in bear markets highlights the adaptability of technical analysis.
Notably, shorter-term indicators like SMA5 yielded higher returns, suggesting that in declining markets, indicators that respond quickly to recent price movements tend to be more effective.
The Long-Short strategy achieving the highest returns demonstrates the risk diversification effect, indicating that a combined approach can be more effective than solely relying on short-selling during market downturns.
Core Sell Point
In global bear markets, technical analysis-based short-term or long-short strategies have shown significantly better performance compared to the Buy & Hold strategy. In particular, strategies utilizing shorter-period moving averages like SMA5 have been more effective in responding to market declines.
The study "Performance of Technical Analysis in Declining Global Markets" analyzes the effectiveness of technical trading strategies during global market downturns. The key findings are summarized below.
Objective
This research examines the performance of technical analysis during global market declines and evaluates whether technical strategies provide higher returns than the Buy & Hold strategy.
Data & Methodology
The study uses data from 1,050 companies across 21 countries.
Key data sources include OSIRIS and Yahoo Finance databases.
The analysis focuses on 2010 (non-declining trend) and 2011 (significant global market decline), with an emphasis on 2011.
Various technical indicators, including SMA (Simple Moving Average) and WMA (Weighted Moving Average), were utilized. Specifically, SMA5, SMA10, SMA15, WMA5, WMA10, and WMA15 were applied.
Three trading strategies were tested: Long (buy-and-hold), Short (short-selling), and Long-Short (combined approach) to ensure robustness.
T-tests and regression analysis were employed for hypothesis testing.
Buy/Sell Signals
Buy Signal: Generated when the stock price crosses above the SMA or WMA. This occurs when P0 > SMAn and P-1 < SMA-1 or P0 > WMAn and P-1 < WMA-1.
Sell Signal: Triggered when the stock price crosses below the SMA or WMA. This occurs when P0 < SMAn and P-1 > SMA-1 or P0 < WMAn and P-1 > WMA-1.
SMA and WMA were used to generate buy/sell signals, determining optimal trading points based on price movements relative to moving averages.
Since WMA assigns greater weight to recent prices, it reacts more sensitively to price fluctuations compared to SMA.
Key Findings
The study analyzed the profitability of technical trading strategies during 2011, a year characterized by significant global market declines.
Overall Profitability
Technical trading strategies outperformed the Buy & Hold strategy.
This suggests that technical analysis can be effective in bear markets.
Performance by Strategy
Long (Buy-and-Hold) Strategy:
SMA-based long trades yielded negative returns (-5.37% for SMA5, -10.85% for SMA10, -11.15% for SMA15).
This indicates that long positions are not suitable in bear markets.
Short (Short-Selling) Strategy:
SMA-based short trades generated positive returns (+9.61% for SMA5, +7.79% for SMA10, +7.84% for SMA15).
This suggests that shorting is an effective strategy during downturns.
Long-Short Strategy:
The SMA5-based Long-Short strategy produced the highest return of 19.16%.
Performance by Indicator
Both SMA and WMA exhibited similar trends.
Shorter-term indicators (SMA5 and WMA5) tended to generate higher returns.
Comparison to Buy & Hold
All technical trading strategies outperformed Buy & Hold after adjusting for market declines.
This indicates that the Buy & Hold strategy is less effective during bear markets.
Conclusion
During a global market downturn like 2011, technical trading strategies yielded better results than the Buy & Hold approach.
Short-term strategies and shorter-period technical indicators (e.g., SMA5, WMA5) were particularly effective.
Key Takeaways
Investors should adjust trading strategies based on market conditions.
In bear markets, technical analysis-based short-term strategies tend to be more profitable, while Buy & Hold is more effective in bull markets.
Final Thoughts
This study provides empirical evidence that technical analysis can be useful during market downturns, reinforcing the importance of adjusting investment strategies based on market conditions. Additionally, factors such as market size should be considered when evaluating the effectiveness of technical analysis.
