FACULTY OF BUSINESS, ECONOMICS AND ACCOUNTANCY

UNIVERSITI MALAYSIA SABAH

TECHNICAL FINANCIAL ECONOMICS

(BF20703)
SEMESTER 2, 2020/2021

GROUP ASSIGNMENT 2
PREPARED FOR:
DR. MORI KOGID

Hereby, we declare that the work contained in this assignment is our own, except
where acknowledgement of sources is made.

PREPARED BY GROUP 7:

Name Matric No. Signature

Deleyana David BB19110953 Deleyana
Guo Chenzhang BB18270063 Guo
Jonathan Tan BB19110655 Jonathan
Rafael Makilin BB19110467 Rafael
Wong Li Ru BB19110798 Wong

SUBMISSION DATE: 18 JUNE 2021

 The Effectiveness of Technical Analysis in Stock, Bond, Gold, Currency, and
Commodity Markets

1.0 Introduction

Technical analysis refers to a trading discipline that use historical price data to identify price trends
and forecast price movements (Chan, 2011, p. 10). Technical analysis study the price and volume
of securities and using its tools to evaluate the strengths of the securities. Technical analysis is not
limited to only one type of securities. In this study, we will discuss about the effectiveness of
technical analysis in stock, bonds, golds, currencies and commodities. A security that represents a
company's ownership rights is known as stock. Bonds are fixed-income investments that represent
a lender's debt to a borrower (typically corporate or governmental). Neither a cash-generating asset
nor a commodity, gold is a precious metal. A means of exchange for goods and services is defined
as this currency. Raw materials or primary items can be bought, sold, and traded on a commodity
market. Technical analysis is particularly effective for deciding when to enter and exit markets in
program designed to control a company's price risk exposure. Technical analysis is a difficult task.
To assist in identifying changes in the price trend's direction, sophisticated mathematical models
can be applied. The following sections will discuss on the other markets.

1.0 The Effectiveness of Technical Analysis:

1.1 Stock Market

Before diving deeper into technical analysis, it is better if we look into what
exactly is the stock market. Stock is a type of security that represents the ownership
right of a company. The term is often used interchangeably with shares as in shares of
a company. Any individual who buys a share of a company is considered to be the
partial owner of the company. Hence, they are entitled to the dividends that are declared
on the stock so long they are holding the shares (Chaudhuri, 2018). Just like any other
products, stocks are bought and sold by many individuals. The aggregation of buyers
and sellers of stocks is called the stock market. Because there are hundreds of thousands

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of transactions being conducted in the stock market every day, the price of stocks
always fluctuates.
No one can accurately predict which stocks are going to generate the highest
return because of the constant fluctuations in the stock market. Thus, past traders and
brilliant minds have formulated a way to forecast the price movements of stocks which
is known as technical analysis. However, sceptics always find a way to point out flaws
in this school of thought. Thus, the question remains. How effective is technical
analysis in stock market? To answer that question, we must look into the technical
analysis techniques that were introduced in the past and what are the researchers view
on them.
The first technical analysis tool that we will touch on is the Dow theory that was
developed by Charles Dow. He is also informally known as the “grandfather of
technical analysis” because this is the first widely used technical tool introduced to the
public. There are six tenets that become the foundation of Dow theory. (i) Averages
discounts everything; (ii) The market has three trends; (iii) Major trends have three
phases; (iv) The averages must confirm each other; (v) Volume must confirm the trend;
(vi) A trend is assumed to be continuous until definite signals of its reversal (IFC
Markets, n.d., p. 3).
The Dow theory had been proven to be quite effective and simple enough to be
implement in technical analysis. However, analysts were not satisfied with it and
wanted to beat the market by a wider margin. Thus, Robert Rhea in 1933 improve the
theory by introducing a calculation on “appreciation index” for a group of stocks (Scott
et al., 2016, p. 8). Rhea’s findings in his study found that a group of stocks with the
highest appreciation indexes outperformed a group of income stocks he created to serve
as a benchmark. It appears that his simple test was actually the first quantified test of
relative strength or RS for short (Scott et al., 2016, p. 8).
In 1945, H.M. Gartley introduced a technical investing tool known as velocity
statistics to the world where the technique was like that of Rhea’s quantified test of
relative strength. Garthley recommend buying stocks with high velocity in bull markets
(Scott et al., 2016, p. 9). According to him, velocity of stocks is calculated by
comparing the trend of each individual stock with the movement of the overall market

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during each timeframe. To obtain a successful velocity expectancy of a stock, a series
of at least ten swings should be covered (Gartley, 1995). He then states that thousands
of velocity computations show that price movements of most individual stocks tend to
swing between 50% and 300% of that of the market which signifies that his velocity
statistics is relevant.
After that, the concept of relative strength was rediscovered in 1993 as
momentum by Narasimhan Jegadeesh and Sheridan Titman (Scott et al., 2016, p. 10).
Their paper shows how momentum can be used to consistently outperform the stock
market. Then, more and more sophisticated technique emerged like the fusion analysis,
cycle analysis, spectral analysis and many more (Scott et al., 2016, p. 11). Nevertheless,
chart pattern analysis remains the most prominent technique used in technical analysis.
Although it is not consistently reliable, technicians have improvised their tools by
combining different indicators such as volume and breadth analysis to their work (Scott
et al., 2016, p. 12).
Over time, researchers from around the world have study the effectiveness of
technical analysis on the stock market. A study titled “Effectiveness of Technical
Analysis Signals Around the Earning Announcements in Malaysian Stock Market”
found that the technical analysis signals can only be used as an informative signal to
track the stock price movement round the earning announcement date (Lee Yong Ming
& Jais, 2018). They specify that Moving Average Convergence Divergence (MACD)
is the best technical indicator to generate higher return as compared to the other
indicator.
Another study on the effectiveness of technical analysis that was already in
Singapore found that on average, the three technical trading rules. Which is the simple
moving average, dual moving average, and trading range breakout consistently
generate higher annual returns in the Singapore stock market compared to the buy-and-
hold strategy in 1988 to 1996 which is before the Asian Financial Crisis (Wong & Kung,
2009). In Vietnam, a study on the same issue found that technical indicators could
maximize the returns during up-trend period and minimize the lost when the market
declines. In addition, the study strongly recommends investors to use RSI indicator to

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 increase the profit because it shows significant better result in up-trend market
compared to MA and MACD indicators (Cuong & Tam, 2018).
Furthermore, similar study has been conducted in China’s stock market. The
study concluded that the short-term moving average trading strategy can obtain
significant excess returns, but the excess returns of the long-term moving average
trading strategy are insignificant (Chen & Hui, 2017). Furthermore, they found that
between the two moving average trading strategy that they test, only KDJ's buy and
sell rules can achieve significant excess returns. While MACD’s buying rules can
achieve significant excess returns, its sell rules cannot. They argued that the technical
analysis in China's stock market can achieve excess returns because it has not yet
reached a weak efficient market.
To sum it up, many studies have found that technical analysis to be effective in
obtaining excess returns in the stock market. However, continuous research on
technical analysis should be conducted to further enhance our understanding on its
effectiveness in the stock market.

1.2 Bond
Some people consider technical analysis to be nothing more than the study of supply
and demand forces as reflected in a security's market price movements. Although price
changes are the most common focus of technical analysis, some analysts track other
metrics, such as trading volume or open interest. This report also studied the bond.
A bond is fixed-income security representing a lender's loan to a borrower (typically
corporate or governmental). A bond can be a promissory note between the lender and
the borrower that outlines the loan's terms and payments. Companies, municipalities,
states, and sovereign governments all use bonds to fund projects and operations.
Bondholders are the issuer's debt holders or creditors. The end date when the loan
principal is due to be paid to the bond owner is usually included in the bond details, as
are the terms for the borrower's variable or fixed interest payments. Many corporate
and government bonds are traded on the open market; others are only traded over the
counter (OTC) or privately between the borrower and the lender. Companies and other
entities may issue bonds directly to investors when they need money to fund new

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projects, maintain ongoing operations, or refinance existing debts. The borrower (issuer)
issues a bond that specifies the loan terms, interest payments, and the time frame in
which the borrowed funds (bond principal) must be repaid (maturity date). The coupon
(interest payment) is part of the return bondholders receive for lending their money to
the issuer. The coupon rate is the interest rate that determines the payment.
In most markets, past market data for bonds is readily available. The bond's price chart
allows technical analysis by overlaying trend lines, moving averages, support and
resistance lines on the chart—the use of technical analysis for stocks, futures,
commodities and currencies (forex). There are not many articles or books about
technical analysis for bonds. In the USA, bond price and volume information collected
by FINRA's TRACE facility is widely distributed to data vendors and is viewable by
retail investors on FINRA's Market Data Center website.

Figure: the 10+ year price chart for PepsiCo Inc

However, most stocks are bought for capital appreciation, with dividends serving as a
nice bonus, but with bonds, it is the income that counts, and people do not buy low and
sell high when it comes to bonds. When bonds are traded, the goal is to buy low and
sell high or sell high and buy low if the position is short because bond trading aims to
make money. Bonds do not appreciate over time like stocks do, as they move away
from par value in one direction or the other depending on interest rate movements, so
we do not expect prices to go up or down in a consistent manner over the investment's

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 lifetime. Therefore, when it comes to predicting these movements accurately, technical
analysis tends to outperform everything else. Because bond trading aims to focus on
and profit from price movements, studying these movements to determine their likely
direction makes sense. Many people find trading difficult because they use overly
complex approaches, far more than is ideal, and the more factors look at and need to
weigh and predict, the more complex the prediction becomes. Many traders, including
bond traders, make many guesses, which is never a good thing, but it is primarily due
to a lack of skill. When it comes to determining momentum, we need to look for clear-
cut indicators to tell us whether we are likely to keep going in the same direction or if
to turn around.
As a result, bond trading techniques are similar to those used in trading any other
financial instrument. They look to measure trends in price changes while taking into
account both the price movement and other factors that traders may use, such as support
and resistance.

1.3 Gold
Generally speaking, among the factors that determine the success or failure of gold
trading, the most critical is whether the price trend of gold can be correctly analyzed
and judged. Gold trading is not like buying big or small. It is entirely based on luck.
Even if income can be obtained, the result cannot be controlled at all. It should be
predicted through specific analysis. There are two main methods for predicting the
price trend: fundamental analysis and technical analysis. Both are to analyze the market
from two different angles. Each has its characteristics in actual operation, so investors
should use them in combination.
Fundamental analysis of gold investment. The fundamental analysis analyses the
external and internal factors of politics, economy, and individual markets. It is coupled
with other investment tools to determine whether the call should enter or exit the market
and adopt complementary strategies. Gold technical analysis is similar to stock
technical analysis. Investors can analyze the trend of gold from K-line graphs, moving
averages, and relative strength indicators to find trading opportunities.

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 When the price of gold is supported by a certain moving average, a rebound
occurs, for example, a 60-minute moving average. For short-term investors, this is a
long signal. When the price of gold falls and breaks below a certain moving average, it
continues to fall. , For example, the 60-minute moving average is a short signal. On the
daily candlestick chart, when the morning Doji, Yangbaoyin and other buying pattern
candlesticks appear, it is a long signal. When the evening Doji, dark cloud cover and
other selling pattern candlesticks appear, it is A short signal.
When the relative strength index (rsi) value exceeds 80, it means that the overall
market power is too strong, and the multi-party power is far greater than the short-side
power. Or change the trend, investors can carry out short operations; when the rsi value
is lower than 20, it means that there are more selling than buying in the market, and the
short side is stronger than the multi side. After the short side aggressively attacked, the
market fell too much. Has been in an oversold state, there may be a rebound or
turnaround, investors can do more operations in an appropriate amount.

1.4 Currency
This currency is define as a medium of exchange of goods and services. Where, the
currency will usually be in the form of banknotes and coins. The currency will be
issued by the government in a country, then generally accept at face value used as a
method of payment. Nowadays, Bitcoin is a new currency that has no physical or
governmental existence, yet will be stored and traded in the virtual realm only
(Frankenfield, 2020).
Technical analysis is a very effective measure in the cryptocurrency market
because the market is speculative in nature, and the range of players differs in terms of
stock market veterans and experienced crypto traders. Due to a lack of general
understanding in cryptocurrency and its intrinsic value, prices fluctuate based on
reactions to type, news and changing mood swings. Accordingly, the cumulative
crypto capitalization is less than $ 500 billion at present. This situation makes the
trading volume in some cryptocurrencies not well known because only the purchase of
10 thousand dollars can cause very significant price changes (BlockchainJournal, 2018).
For retail, forex has offered a free demo account allows investors to learn before risking

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capital in a real account. Traders will study charts, retest and find the latest forex news
(Sons, 2006). This situation indicates that analytical techniques are essential to
evaluate the currency market effectively.
As a result, market conditions will often manipulate and commit fraudulent
schemes such as pumping and dumping. Thus, the behavior of buyers and sellers exerts
a very sensitive impact on the cryptocurrency market. Robots are also one of the factors
influencing the cryptocurrency market through trading algorithms using technical
analysis. As such, a combination of low volumes that cause excessive volatility in
cryptocurrency, robots that do not directly respond to price equilibrium based on
technical analysis and the behaviors of buyers and sellers against price changes in the
market. It shows that analytical techniques can be rely upon to predict changes in price
trends (BlockchainJournal, 2018).
According to Osler and Chang (1995) have implemented an algorithm to identify
“head-and-shoulders” in the currency market. This study allows them to find evidence
that shows the resulting patterns can be use to predict in several currency markets.
Subsequently, Lo, Mamaysky and Wang (2000) have developed this guide to predict
some of the price patterns commonly used in the context of equity markets. At the
same time, the price chain is launched using kernel average regression to provide a
plausible analogue for the human-performed signal extraction task that identifies the
occurrence of price patterns. The purpose is to produce an objective re -subjective
procedure. As a result, the use of this technical analysis becomes more effective in
predicting and identifying the currency market.
Kozhan and Salmon (2010) used tick-by-tick data for the pound sterling against
the US dollar taken from the Reuters D3000 trading system in separate periods in 2003
and 2008. As a result, they found that trading rules based on genetic algorithms were
able to obtain significant profit after transaction costs in 2003 but this profit
disappeared in 2008. Subsequently, the use of high -frequency data in comparing
commercial real -time trading models used by most technical traders and exponential
weighted moving average models. Other studies have expanded the literature in
technical analysis by making studies of the application of such rules to exchange rates

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 other than the major dollar (Gençay et al, 2003a). Therefore, it is clear that analytical
techniques are very effective in the currency market.

1.5 Commodity Markets

A commodity market is where raw materials or primary goods can be bought,
sold, and traded. Hard commodities (natural resources) and soft commodities
(consumables) are the two sorts of commodities (livestock or agricultural products).
Commodities markets provide a centralized and liquid marketplace for producers and
consumers of commodity products. Market participants can also utilize commodity
derivatives to hedge future consumption or output. In these markets, speculators,
investors, and arbitrageurs all play a role.
(Awokuse & Yang, 2003) discovered that Commodity Futures Market Asset
Stability and Hedging Effectiveness Introduction Commodity futures markets provide
two critical economic functions: they give a hedging (or risk transfer) mechanism. They
contribute to the price discovery process. Commodity futures markets must provide
one or both of these tasks to be economically viable. As a result, knowing the
effectiveness of the hedging function on commodity futures markets is critical to our
understanding of these markets.
The conditional variance in equation (1c), expressed as a linear function of past
squared errors, historical values of the conditional variance 𝜎𝑡2 , is used to measure
commodity price volatility. Unlike earlier research, this study's MGARCH model
specification is based on Engle and Kroner's (1995) BEKK specification, which is
sufficiently generic and assures a positive definite conditional covariance matrix.
This study employs two methods to assess the hedging efficacy of commodities
futures markets. The time-varying conditional correlation is one measure that can be
calculated (Darbar and Deb, 1997; Fleming, Kirby and Ostdiek, 1998). As employed
by Baillie and Myers (1991) and Kavussanos and Nomikos, the variance reduction
measure is the other measure (2000).
So, we know that the efficiency of risk minimization hedging for major storable
and nonstorable agricultural commodities futures markets is investigated in this study.

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 The findings may help to clarify the relative responsibilities of hedging and price
discovery tasks performed by (nonstorable) cattle futures markets, which is crucial for
their effective usage.
Commodities, like any other investment, can be profitable, but they also carry
hazards. An investor must comprehend the markets of the product they seek to trade,
such as the fact that oil prices might change depending on the Middle East's political
atmosphere. ETFs offer more diversification and lower risks, but futures are more
speculative and carry higher risks due to margin needs. In general, commodities are
considered a hedge against inflation, and gold, in particular, is viewed as a hedge
against a market downturn.

2.0 Conclusion

Overall, analytical techniques are very useful to evaluate the stock market, bonds, golds, currencies
and commodities based on historical price trends and predict price movements. In the stock market,
technical analysis used is Dow theory, appreciation index, relative strength concept, chart pattern
analysis, relative strength concept and studies taken from Malaysia, Singapore, Vietnam and China
to see the technical effectiveness of analysis in the stock market. In addition, among the technical
analysis in bonds is to look at bond price charts, studies from the US and the way traders in
analyzing bonds are used to see the effectiveness of technical analysis.

Next, technical analysis in gold is the use of basic analysis of gold investment, looking at
daily candlestick charts, and relative strength index is used to look at the technical effectiveness
of analysis in gold. In addition, the use of technical analysis in currency is to look at
cryptocurrency trends, the use of robots, buyer and seller behavior, “head and shoulders” theory,
equity market context, the use of tick-by-tick data and the use of frequency data is used to see how
the effectiveness of technical analysis in currency. Finally, technical analysis used in commodity
markets is to look at Futures Asset Stability and Hedging Effectiveness Market Introduction,
conditional variance based on linear function and MGARCH model based on BEKK Engle and
Kroners specifications to look at technical analysis effectiveness in commodity market.

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