The Empirical Validity of Technical Indicators and StrategiesThis article critically examines the empirical evidence concerning the effectiveness of technical indicators and trading strategies. While traditional finance theory, notably the Efficient Market Hypothesis (EMH), has long argued that technical analysis should be futile, a large body of academic research both historical and contemporary presents a more nuanced view. We explore key findings, address methodological limitations, assess institutional use cases, and discuss the impact of transaction costs, market efficiency, and adaptive behavior in financial markets.
1. Introduction
Technical analysis (TA) remains one of the most controversial subjects in financial economics. Defined as the study of past market prices and volumes to forecast future price movements, TA is used by a wide spectrum of market participants, from individual retail traders to institutional investors. According to the EMH (Fama, 1970), asset prices reflect all available information, and hence, any predictable pattern should be arbitraged away instantly. Nonetheless, technical analysis remains in widespread use, and empirical evidence suggests that it may offer predictive value under certain conditions.
2. Early Empirical Evidence
The foundational work by Brock, Lakonishok, and LeBaron (1992) demonstrated that simple trading rules such as moving average crossovers could yield statistically significant profits using historical DJIA data spanning from 1897 to 1986. Importantly, the authors employed bootstrapping methods to validate their findings against the null of no serial correlation, thus countering the argument of data mining.
Gencay (1998) employed non-linear models to analyze the forecasting power of technical rules and confirmed that short-term predictive signals exist, particularly in high-frequency data. However, these early works often omitted transaction costs, thus overestimating potential returns.
3. Momentum and Mean Reversion Strategies
Momentum strategies, as formalized by Jegadeesh and Titman (1993), have shown persistent profitability across time and geographies. Their approach—buying stocks that have outperformed in the past 3–12 months and shorting underperformers—challenges the EMH by exploiting behavioral biases and investor herding. Rouwenhorst (1998) confirmed that momentum exists even in emerging markets, suggesting a global phenomenon.
Conversely, mean reversion strategies, including RSI-based systems and Bollinger Bands, often exploit temporary price dislocations. Short-horizon contrarian strategies have been analyzed by Chan et al. (1996), but their profitability is inconsistent and highly sensitive to costs, timing, and liquidity.
4. Institutional Use of Technical Analysis
Contrary to the belief that TA is primarily a retail tool, it is also utilized—though selectively—by institutional investors:
Hedge Funds: Many quantitative hedge funds incorporate technical indicators within multi-factor models or machine learning algorithms. According to research by Neely et al. (2014), trend-following strategies remain a staple among CTAs (Commodity Trading Advisors), particularly in futures markets. These strategies often rely on moving averages, breakout signals, and momentum filters.
Market Makers: Although market makers are primarily driven by order flow and arbitrage opportunities, they may use TA to model liquidity zones and anticipate stop-hunting behavior. Order book analytics and technical levels (e.g., pivot points, Fibonacci retracements) can inform automated liquidity provision.
Pension Funds and Asset Managers: While these institutions rarely rely on TA alone, they may use it as part of tactical asset allocation. For instance, TA may serve as a signal overlay in timing equity exposure or in identifying risk-off regimes. According to a CFA Institute survey (2016), over 20% of institutional investors incorporate some form of technical analysis in their decision-making process.
5. Adaptive Markets and Conditional Validity
Lo (2004) introduced the Adaptive Markets Hypothesis (AMH), arguing that market efficiency is not a binary state but evolves with the learning behavior of market participants. In this framework, technical strategies may work intermittently, depending on the ecological dynamics of the market. Neely, Weller, and Ulrich (2009) found technical rules in the FX market to be periodically profitable, especially during central bank interventions or volatility spikes—conditions under which behavioral biases and structural inefficiencies tend to rise.
More recent studies (e.g., Moskowitz et al., 2012; Baltas & Kosowski, 2020) show that momentum and trend-following strategies continue to deliver long-term Sharpe ratios above 1 in diversified portfolios, particularly when combined with risk-adjusted scaling techniques.
6. The Role of Transaction Costs
Transaction costs represent a critical variable that substantially alters the net profitability of technical strategies. These include:
Explicit Costs: Commissions, fees, and spreads.
Implicit Costs: Market impact, slippage, and opportunity cost.
While early studies often neglected these elements, modern research integrates them through realistic backtesting frameworks. For example, De Prado (2018) emphasizes that naive backtesting without cost modeling and slippage assumptions leads to a high incidence of false positives.
Baltas and Kosowski (2020) show that even after accounting for bid-ask spreads and market impact models, trend-following strategies remain profitable, particularly in futures and FX markets where costs are lower. Conversely, high-frequency mean-reversion strategies often become unprofitable once these frictions are accounted for.
The impact of transaction costs also differs by asset class:
Equities: Higher costs due to wider spreads, especially in small caps.
Futures: Lower costs and higher leverage make them more suitable for technical strategies.
FX: Extremely low spreads, but high competition and adverse selection risks.
7. Meta-Analyses and Recent Surveys
Park and Irwin’s (2007) meta-analysis of 95 studies found that 56% reported significant profitability from technical analysis. However, profitability rates dropped when transaction costs were included. More recent work by Han, Yang, and Zhou (2021) extended this review with data up to 2020 and found that profitability was regime-dependent: TA performed better in volatile or trending environments and worse in stable, low-volatility markets.
Other contributions include behavioral explanations. Barberis and Thaler (2003) suggest that TA may capture collective investor behavior, such as overreaction and underreaction, thereby acting as a proxy for sentiment.
8. Limitations and Challenges
Several methodological issues plague empirical research in technical analysis:
Overfitting: Using too many parameters increases the likelihood of in-sample success but out-of-sample failure.
Survivorship Bias: Excluding delisted or bankrupt stocks leads to inflated backtest performance.
Look-Ahead Bias: Using information not available at the time of trade leads to unrealistic results.
Robust strategy development now mandates walk-forward testing, Monte Carlo simulations, and realistic assumptions on order execution. The growing field of machine learning in finance has heightened these risks, as complex models are more prone to fitting noise rather than signal (Bailey et al., 2014).
9. Conclusion
Technical analysis occupies a contested but persistent role in finance. The empirical evidence is mixed but suggests that technical strategies can be profitable under certain market conditions and when costs are minimized. Institutional investors have increasingly integrated TA within quantitative and hybrid frameworks, reflecting its conditional usefulness.
While TA does not provide a universal arbitrage opportunity, it can serve as a valuable tool when applied adaptively, with sound risk management and rigorous testing. Its success ultimately depends on context, execution discipline, and integration within a broader investment philosophy.
References
Bailey, D. H., Borwein, J. M., Lopez de Prado, M., & Zhu, Q. J. (2014). "The Probability of Backtest Overfitting." *Journal of Computational Finance*, 20(4), 39–69.
Baltas, N., & Kosowski, R. (2020). "Trend-Following, Risk-Parity and the Influence of Correlations." *Journal of Financial Economics*, 138(2), 349–368.
Barberis, N., & Thaler, R. (2003). "A Survey of Behavioral Finance." *Handbook of the Economics of Finance*, 1, 1053–1128.
Brock, W., Lakonishok, J., & LeBaron, B. (1992). "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns." Journal of Finance, 47(5), 1731–1764.
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). "Momentum Strategies." Journal of Finance, 51(5), 1681–1713.
De Prado, M. L. (2018). Advances in Financial Machine Learning, Wiley.
Fama, E. F. (1970). "Efficient Capital Markets: A Review of Theory and Empirical Work." Journal of Finance, 25(2), 383–417.
Gencay, R. (1998). "The Predictability of Security Returns with Simple Technical Trading Rules." Journal of Empirical Finance, 5(4), 347–359.
Han, Y., Yang, K., & Zhou, G. (2021). "Technical Analysis in the Era of Big Data." *Review of Financial Studies*, 34(9), 4354–4397.
Jegadeesh, N., & Titman, S. (1993). "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency." *Journal of Finance*, 48(1), 65–91.
Lo, A. W. (2004). "The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective." *Journal of Portfolio Management*, 30(5), 15–29.
Moskowitz, T. J., Ooi, Y. H., & Pedersen, L. H. (2012). "Time Series Momentum." *Journal of Financial Economics*, 104(2), 228–250.
Neely, C. J., Weller, P. A., & Ulrich, J. M. (2009). "The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market." *Journal of Financial and Quantitative Analysis*, 44(2), 467–488.
Neely, C. J., Rapach, D. E., Tu, J., & Zhou, G. (2014). "Forecasting the Equity Risk Premium: The Role of Technical Indicators." *Management Science*, 60(7), 1772–1791.
Park, C. H., & Irwin, S. H. (2007). "What Do We Know About the Profitability of Technical Analysis?" *Journal of Economic Surveys*, 21(4), 786–826.
Rouwenhorst, K. G. (1998). "International Momentum Strategies." *Journal of Finance*, 53(1), 267–284.
Zhu, Y., & Zhou, G. (2009). "Technical Analysis: An Asset Allocation Perspective on the Use of Moving Averages." *Journal of Financial Economics*, 92(3), 519–544.
SP500 trade ideas
Waiting for a Clear Signal: Too Early to Short the IndexNothing interesting is forming on the index so far.
My outlook remains neutral.
I previously attempted to short it, but those attempts were unsuccessful. Now I need to wait for a more reliable entry point — the chart will show the way.
For now, I’m staying on the sidelines.
Historically, the start of the Fed’s rate-cutting cycle has always coincided with the beginning of a decline in the stock market. I believe this time won’t be an exception — but for now, it’s too early to short.
SPX - Time for a correction? To make it very simple,
Prices have been going up very nicely those last few weeks and months.
Everyone is happy but as we know that can't last.
NASDAQ:OPEN seems to be the latest pump and dump and it's just another sign of a coming correction imho.
Most stocks I've been following have reached resistance zone, levels where profit taking is very likely.
$S&P500 seems to have made a fifth wave, RSI divergence is present and confirming that.
It's difficult to pinpoint the exact top of course so I'm giving myself some leeway and use a small 1% stop loss in this case.
S&P's "hugely overbought" towards 6375!1). Position Volume dropping! 2). Big institutions (Banks & Insurance) have backed off on higher Risk positions! 3). Huge resistance at .728 fib & trend! 4). Trump tariff talk is likely adding to a fall as well! 5). We're looking for a "SELL" trade @ 6375, since buying is too risky at the moment...Good Luck!
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15_MinThis is a 15-minute timeframe chart, where each candlestick represents 15 minutes of trading activity. It is primarily used by intraday traders and scalpers to identify short-term trends, breakout zones, and momentum plays.
This chart of the S&P 500 (SPX) reflects intraday movements with real-time tracking of support/resistance zones, volume spikes, and short-term patterns.
If we want a 2020-2021 style run, we need a seasonal pullbackUS 500 Index SP:SPX AMEX:SPY AMEX:VOO August seasonal scenario: institutional participation remains light, being outperformed by leveraged dip buying retail. How long can they remain on the sidelines, missing opportunities for their clients, before FOMO kicks in? Remember that institutions aren't emotionally driven, unlike their retail counter parts. That being said, they're itching to get in. What will compel them? IMO, a 5% pull back will incentivize them to buy. The August seasonal pull back may provide just that opportunity. If it comes, what happens in late Q3 and the rest of Q4 will likely be similar to 2020-2021. The deeper the pull back, the more impulsive it will likely be, as retail and institutions will be temporarily in tandem. SP:SPX PEPPERSTONE:US500 AMEX:SPY AMEX:VOO
S&P 500 Daily Chart Analysis For Week of July 18, 2025Technical Analysis and Outlook:
During the current trading week, the S&P 500 Index has demonstrated a predominantly upward trajectory. It has successfully retested the Mean Support level at 6200 and established a new Key Resistance level at 6314. Currently, the index displays a bullish sentiment, with the objective for the Outer Index Rally set at 6420.
Nevertheless, it is essential to recognize that the current price action may result in a decline, potentially leading to a retest of the Mean Support at 6244 and extending to the Mean Support at 6201. Following this potential downward movement, it is anticipated that the index will resume its upward trend, driving the price action towards the Key Resistance level at 6314 and ultimately achieving the Outer Index Rally target of 6420.
US500 Swing short tradeUS500 index is on the verge of major drop. I expect the price to sink in the coming weeks, that's why this will be a swing trade. I expect to reach my main target of $6000 around mid/end of August, with a second short entry once we will start to drop and retrace till my key level.
SPX 500 TO CONTINUE HIGHER Week of July 20, 2025 SPX500 will continue going higher as we don't have any reversal setup yet on the higher time frames, although there is a lot of hesitation on the chart as the past week's new high was not supported. The trend on 4 hours to weekly is still up and has no break of major moving averages yet. I am looking forward to either a capitulation new high candle or a bullish new high candle that breakout of the weekly consolidation zone as we enter another trading week. I hope my thought process and analysis is helpful for making your own trading or investment decisions.
Thank you for listening and wish everyone a great trading week.
Cheers
1_Day_ChartThis chart represents the 1-day (Daily timeframe) price action of the S&P 500 Index (SPX), offering a focused view of market sentiment, key levels, and trend momentum as of . Each candlestick reflects a full trading day.
📊 Chart Parameters:
Instrument: S&P 500 Index (SPX)
Timeframe: 1D (1-Day)
Exchange: NYSE / NASDAQ Composite (tracked as index)
Date Range Displayed: Past 3–6 months (approx.)
3 month rally just not sustainable SPXThe economy is not doing horribly, but many are citing lagging indicators and there's signs of that this level is just not sustainable. Current levels abouve 9, 50, 200 SMAs! Seriously, what's great that isn't artificially propped up. Highest bankruptcies, highest level of housing unaffordability, dollar losing over 10% of value YTY, unemployment #s but that's bc people are giving up and it's a lagging indicator, hardship withdrawals up, defaults across the board up at over 10 year levels, banks with historic unrealized losses on their books (how much did Wells Fargo drop the other day!), yields going up up up. The Champage effect will end and many will get wiped out, unfortunately. Not being a dooms day person, but this economy is overheated and it's mostly driven by tech, which is over represented in the S&P. VIX is pretty low right now, would be an interesting play when it starts spiking (and it will!) when the deck starts falling apart.
Best of luck and always do your own due diligence.
More upside for SPX500USDHi traders,
Last week SPX500USD made a small correction down (grey wave 4) and after it swept the dotted trendline it went up again. This could be the next impulse wave 5 (grey).
If this is true, then next week we could see more upside for this pair.
Let's see what the market does and react.
Trade idea: Wait for a small pullback and a change in orderflow to bullish on a lower timeframe to trade longs.
If you want to learn more about trading FVG's & liquidity sweeps with Wave analysis, then please make sure to follow me.
This shared post is only my point of view on what could be the next move in this pair based on my technical analysis.
Don't be emotional, just trade your plan!
Eduwave
S&P500 sideways consolidation breakoutKey Developments:
Fed Politics: Treasury Secretary Scott Bessent called for a review of the Fed’s $2.5B HQ renovation, continuing political pressure on Jerome Powell. This adds to the uncertainty around Fed independence and rate path.
Meme Stock Surge:
Opendoor soared 121% amid a retail-driven frenzy.
Major institutional investors are also chasing the rally, pushing broader equities to record highs.
However, upcoming Alphabet and Tesla earnings could be a turning point for momentum.
Corporate News:
Hewlett Packard Enterprise suffered a $985M loss in the Autonomy case—corporate governance and M&A risks in spotlight.
Sarepta paused drug shipments amid backlash—biotech volatility rising.
LA Times plans IPO—media valuations may resurface.
Crypto Moves:
Trump Media bought $2B in Bitcoin and related assets, aiming to become a crypto treasury.
JPMorgan may lend against crypto, signaling broader institutional adoption.
Tech & AI:
MIT’s Andrew Lo predicts AI will make real investment decisions in 5 years.
OpenAI–Oracle to expand US data center capacity by 4.5 GW—significant tech infrastructure tailwind.
Conclusion for S&P 500 Trading:
The S&P 500 remains supported by strong risk appetite, AI optimism, and crypto momentum, but faces near-term tests from key tech earnings (Alphabet, Tesla). Political noise around the Fed and signs of speculative froth (meme stocks) could introduce volatility. Stay bullish with caution—watch earnings and Fed commentary closely for market direction.
Key Support and Resistance Levels
Resistance Level 1: 6340
Resistance Level 2: 6390
Resistance Level 3: 6457
Support Level 1: 6270
Support Level 2: 6224
Support Level 3: 6156
This communication is for informational purposes only and should not be viewed as any form of recommendation as to a particular course of action or as investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Opinions, estimates and assumptions expressed herein are made as of the date of this communication and are subject to change without notice. This communication has been prepared based upon information, including market prices, data and other information, believed to be reliable; however, Trade Nation does not warrant its completeness or accuracy. All market prices and market data contained in or attached to this communication are indicative and subject to change without notice.
US stocks hold near record highs on strong 2Q earnings
Despite elevated valuation pressures, US equities remain near all-time highs. While tariff concerns persist, resilient US economic data continues to support the market's upward momentum.
United Airlines reported a 1.7% YoY increase in 2Q revenue, citing easing geopolitical and macroeconomic uncertainties and a double-digit rebound in corporate demand. Meanwhile, earnings and share performance among mega-cap stocks have also been strong.
Netflix (NFLX) beat market expectations with 2Q revenue of $11.08 billion and EPS of $7.19. At the same time, Nvidia (NVDA) reached a fresh all-time high on renewed optimism over a potential resumption of exports to China.
After testing the support at 6285, US500 rebounded and approached its previous high again. The index holds above EMA21, suggesting the continuation of bullish momentum. If US500 remains above both EMA21 and the support at 6285, the index could breach the 6320 high. Conversely, if the US500 breaks below the support at 6285, the index could retreat further toward 6200.
S&P 500 (US500) maintains strong bullish momentum.S&P 500 (US500) maintains strong bullish momentum.
Technical Outlook
S&P 500 (US500) holds a strong bullish structure, continuing to print higher highs and higher lows above diverging EMAs, signaling sustained upward momentum.
RSI has eased from overbought levels, now hovering below 70, while price consolidates sideways near recent highs, a typical pause before potential continuation.
ADX remains elevated above DI+ and DI-, with DI+ above DI–, confirming trend strength and ongoing bullish momentum.
A breakout above the 6300 all-time high would confirm a bullish continuation, with the next upside target near 6500 based on the flagpole projection.
Conversely, a drop below 6200 may trigger a deeper pullback toward the 6050 support zone.
Fundamental Outlook
Corporate earnings, particularly in the tech sector, continue to exceed expectations, providing significant support to the index. Analysts project continued earnings growth for S&P 500 companies, with profits expected to grow by approximately 9% year-over-year in 2025, reinforcing confidence in the index’s rising fundamental valuation.
Markets are now pricing in earlier Fed rate cuts, driven by evolving economic data and political pressure.
Economic data such as stronger-than-expected retail sales and unemployment claims, though the latter could reduce the likelihood of imminent rate cuts, signal robust consumer demand, which should continue to support economic growth.
by Terence Hove, Senior Financial Markets Strategist at Exness
S&P overbought sideways consolidation supported at 6207 Fed Signals Rate Cut Ahead
US Federal Reserve Governor Christopher Waller called for a quarter-point interest rate cut this month, citing cooling inflation and minimal upside price risks. His dovish stance diverges from the broader FOMC consensus, which still views the labor market as resilient.
UK-Germany Defense Pact
UK PM Keir Starmer signaled potential alignment with Germany to purchase US weapons for Ukraine, following the signing of the “Kensington Treaty.” The accord emphasizes mutual defense cooperation, raising expectations of deeper UK involvement in European security initiatives.
Intel Concerns with Spain
US lawmakers raised concerns over intelligence sharing with Spain, due to the country's reliance on Huawei for its wiretap infrastructure, highlighting geopolitical tech tensions.
Trump Authorizes Epstein Testimony Release
President Donald Trump has authorized the release of grand jury testimony from the Epstein case, yielding to public and political pressure for greater transparency.
S&P 500 Outlook:
Waller’s call for a rate cut adds bullish momentum for equities, especially rate-sensitive sectors like tech and real estate. While geopolitical tensions and defense headlines introduce headline risk, the dovish Fed signal is likely to dominate sentiment in the near term. Expect S&P 500 support near 6207 with upside potential if more Fed officials echo Waller’s stance.
Key Support and Resistance Levels
Resistance Level 1: 6336
Resistance Level 2: 6383
Resistance Level 3: 6420
Support Level 1: 6207
Support Level 2: 6160
Support Level 3: 6113
This communication is for informational purposes only and should not be viewed as any form of recommendation as to a particular course of action or as investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Opinions, estimates and assumptions expressed herein are made as of the date of this communication and are subject to change without notice. This communication has been prepared based upon information, including market prices, data and other information, believed to be reliable; however, Trade Nation does not warrant its completeness or accuracy. All market prices and market data contained in or attached to this communication are indicative and subject to change without notice.