Prices of securities in the stock market fluctuate daily on account of continuous buying and selling. Technical analysts believe that stock prices move in trends and are never stable. Therefore, past prices and volume data provide indicators of future price movements and help in investment decisions. John J. Murphy, an American financial market analyst, is considered the father of inter-market technical analysis. Many fund managers and traders are skeptical about the usefulness of technical analysis mainly because there is no theoretical base and random walk for the stock prices. Therefore few research papers have been observed in order to know the applicability and profitability of technical analysis.
Technical analysis does not give the intrinsic value of a security, but use charts and other tools to identify patterns that can suggest future activity. Blume, Easley and O’hara (1994) showed how volume and prices can be informative and benefits traders who use information contained in market securities. Park and Irwin (2004) reviewed the evidence on the profitability of technical analysis by reviews survey, theoretical and empirical studies regarding technical trading strategies. Similarly, profitability in the US equity market was seen with the help of candlestick technical analysis by Marshall, Young and Rose (2007). Gomathi and Matheswari (2011) analysed the equity shares of SBI with the help of technical analysis to discover the trend in the future. Chitra (2011) also technically analysed selected stocks of energy sector in India and draw a comparison among them for the purpose of investing.
Blume, Easley and O’hara examined the role of volume and trade information, employed to investigate how market clearing prices reflect underlying information and how traders learn from prices. To investigate they used simplified versions of models developed by Brown and Jennings and Grundy and McNichols that address the...