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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.