Skip Navigation


Journal of Financial Econometrics Advance Access first published online on December 27, 2006
This version published online on February 22, 2007
Journal of Financial Econometrics, doi:10.1093/jjfinec/nbl012
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
5/2/243    most recent
nbl012v3
nbl012v2
nbl012v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Savin, G.
Right arrow Articles by Zvingelis, J.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

Copyright © The Author 2006. Published by Oxford University Press.

The Predictive Power of "Head-and-Shoulders" Price Patterns in the U.S. Stock Market

Gene Savin
     The University of Iowa

Paul Weller
     The University of Iowa

Janis Zvingelis
     Mesirow Financial

Address correspondence to Paul Weller, Department of Finance, Henry B. Tippie College of Business, The University of Iowa, Iowa City, IA 52242, or e-mail: paul-weller{at}uiowa.edu


  Abstract

We use the pattern recognition algorithm of Lo, Mamaysky, and Wang (2000) with some modifications to determine whether "head-and-shoulders" (HS) price patterns have predictive power for future stock returns. The modifications include the use of filters based on typical price patterns identified by a technical analyst. With data from the S&P 500 and the Russell 2000 over the period 1990–1999 we find little or no support for the profitability of a stand-alone trading strategy. But we do find strong evidence that the pattern had power to predict excess returns. Risk-adjusted excess returns to a trading strategy conditioned on "head-and-shoulders" price patterns are 5–7% per year. Combining the strategy with the market portfolio produces a significant increase in excess return for a fixed level of risk exposure.

KEYWORDS: kernel regression, stock prices, technical analysis

We are grateful to Bruce Lehmann, to three referees, and to seminar participants at the University of Iowa for very helpful comments, and to Ken French for making available the data on factor risk portfolios.

Received May 3, 2003; revised December 6, 2005; accepted November 27, 2006


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?




Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.