Technical Analysis
The proof

Many people doubt that technical analysis is useful.
Some believe it is akin to reading tea leaves.
More and more authorities are now accepting and supporting technical analysis.

BUT:--
Price charts summarise the underlying opinions and emotions of the market participants.
Every chart tells a story.
It pays to understand the stories in the price charts.

Introduction

The subject of technical analysis is very broad, and includes some topics that some people regard as on the fringe. However, there are core aspects of this subject that are very widely accepted, and implemented effectively by financial market participants for the investing and trading of shares, currencies, commodities and more.

However, many professionals in the finance industry still refute the notions of technical analysis for a variety of reasons - and some of these might be self-interested and selfish reasons.

There are many research papers compiled over the years with varying degrees of support for the subject. The references below are just some of these.

Price charts summarise the underlying
opinions and emotions of the market participants.
Every chart tells a story.
It pays to understand the stories in the price charts.

Professional technical analysis on Wall Street

In December 2004 a very interesting meeting with profound ramifications took place in the US. Ralph Acampora, CMT co-founder (CMT - Chartered Market Technician) and past president of the MTA (Market Technicians Association), has described what took place in 2004 as follows (reproduced from MTA material on the 10th anniversary of that meeting in December 2014).

"On Friday 17th December 2004, the MTA presented their case for the use of professional technical analysis on Wall Street before 20 NYSE, AMEX and NASDAQ lawyers. The question before the lawyers was whether or not the CMT would be recognized with the same weight and value as a CFA (Chartered Financial Analyst) under the new regulatory code brought forth through the Sarbanes-Oxley Act.

• David Krell, CMT spoke for three minutes about the history of technical analysis.
• Ken Tower, CMT spoke for three minutes about the history of the MTA.
• Barry Sine, CFA, CMT spoke for three minutes about the CMT Program and designation.
• Ralph Acampora, CMT concluded with a five minute presentation that spoke of the value of "fusing" all the analytical disciplines – Fundamental, Behavioral and Quantitative/Technical. It was then that one of the lawyers asked the now famous question: "What is fact on that chart?" Ralph responded that: "Price is a fact. Furthermore, earnings are an estimate. Companies can restate earnings, but the market never restates the price".
• Jordan Kotick, the President of the MTA at that time; John Kirby, the Executive Director of the MTA at that time; our exam psychometrician and our lawyer were also present on this, the most important date in our modern history.

The ruling in favor of the CMT is a lasting testimonial to the professionalism of the MTA. FINRA continues to recognize CMT charterholders with an exemption on the Series 86 Registered Research Analyst exam and the MTA continues to promote this highest order of professionalism, competency and ethical practice in the field of technical analysis."

The discussions and outcome from that meeting are indeed profound for the use of technical analysis around the world. The bit that we really like in the above is the question: "What is fact on that (price) chart?", the fantastic answer to which is:

On a price chart, the price is a fact. Furthermore, company earnings are an estimate. Companies can restate earnings, but the market never restates the price.

Technical, academic and research papers

Do Momentum Strategies Work? - Australian Evidence. DREW, VEERARAGHAVAN and YE, Discussion Paper No. 169, 2004. School of Economics and Finance Queensland University of Technology. Especially see the Conclusion section p18.
See more details here: http://eprints.qut.edu.au/313/1/WP_Drew_Momentum.pdf

Head and Shoulders above the Rest? The Performance of Institutional Portfolio Managers who Use Technical Analysis. SMITH, FAUGERE and WANG, 2013. Department of Finance and Center for Institutional Investment Management, School of Business, University at Albany (SUNY), Albany, NY 12222 USA. In particular refer to the Conclusion section on p23: "In view of these results, we conclude that the net effect of technical analysis on the management of institutional equity-related portfolios has beenbeneficial, although in an unexpected way."
See more details here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2202060

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical. LO, A.W., et al., 2000. The Journal of Finance. A 60-page extract from "THE JOURNAL OF FINANCE", VOL. LV, NO. 4, AUGUST 2000. In particular see the Conclusion section on page 1753.
See more details here: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.134.1546

The Profitability of Technical Analysis: A Review. PARK, C.H. and S.H. IRWIN, 2004. AgMASProject Research Report 2004-04. In particular see the Conclusion section, and the Table 1, "Summary of early technical analysis studies published between 1961 and 1987", pp72-78, and Table 3, "Summary of standard technical analysis studies published between 1988 and 2004", pp80-84. Also see other tables for further references, including Table 10, page 102.
See more details here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=603481

Position sizing methods for a trend following CTA. Master of Science Thesis, Stockholm, Sweden, 2014. Henrik Sandberg, Rasmus Öhman. [CTA - Commodity Trading Advisor]
See the research paper here: http://www.diva-portal.org/smash/get/diva2:730028/FULLTEXT01.pdf

Useful quotations

"...technical trading strategies may be profitable because they presume that price adjusts sluggishly
to new information due to noise, market power, traders’ irrational behavior, and chaos. In these
models, thus, there exist profitable trading opportunities that are not being exploited. Such sharp
disagreement in theoretical models makes empirical evidence a key consideration in determining
the profitability of technical trading strategies." Source: Park and Irwin, 2004, page 50.

"In conclusion, we found consistent evidence that simple technical trading strategies were
profitable in a variety of speculative markets at least until the early 1990s. As discussed above,
however, most previous studies are subject to various problems in their testing procedures.
Future research must address these problems in testing before conclusive evidence on the
profitability of technical trading strategies is provided." Source: Park and Irwin, 2004, page 54.

More details...

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Last revised: 13 January, 2016.