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

Posted: 16 Jun 2008

See all articles by N. Eugene Savin

N. Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Paul A. Weller

University of Iowa - Department of Finance

Janis Zvingelis

Mesirow Financial Investment Management

Date Written: Spring 2007

Abstract

We use the pattern recognition algorithm of Lo, Mamaysky, and Wang () 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

Suggested Citation

Savin, Nathan Eugene and Weller, Paul A. and Zvingelis, Janis, The Predictive Power of Head-and-Shoulders Price Patterns in the U.S. Stock Market (Spring 2007). Journal of Financial Econometrics, Vol. 5, Issue 2, pp. 243-265, 2007, Available at SSRN: https://ssrn.com/abstract=1145511 or http://dx.doi.org/10.1093/jjfinec/nbl012

Nathan Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)

Paul A. Weller (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States
319-335-1017 (Phone)
319-335-3690 (Fax)

Janis Zvingelis

Mesirow Financial Investment Management ( email )

350 N. Clark
Chicago, IL 60610
United States

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