Abstract
The effectiveness of technical analysis as an investment strategy has been a subject
of debate in academia and the investment community due to its contradiction to the
Efficient Market Hypothesis and Random Walk Theory. The use of technical analysis
by investors has, however, persisted over the years with some advocating for its
effectiveness in inefficient markets, citing volatility as a major contributor to
inefficiency. This study tests the profitability of technical analysis trading rules during
volatile periods in the South African equities market. The study applies the dual moving
average crossover and the relative strength index on the FTSE/JSE Top 40 Index over
a period of 13 years from 2007 to 2019. The findings indicate that technical trading
rules are not profitable over the sample period and the returns generated by the
technical trading rules have no correlation with the level of volatility in the market. The
findings do, however, indicate that the returns generated by the technical trading rules
during periods of higher-than-average market volatility are higher than when market
volatility is disregarded. When the trades are segmented into long and short trades,
the study finds that the returns generated by the long trades are higher than those
generated by the short trades.
Keywords: Technical Analysis, Fundamental Analysis, Moving Averages, Dual
Moving Average CrCrossover, Relative Strength Index, Dow Theory, FTSE/JSE Top 40
Index, Market Volatility, JSE.