PDF Ebook Highs and Lows: A Behavioral and Technical Analysis
The behavioral finance literature tries to explain what motivates investors to trade. Barber and Odean (2005) emphasize that investors tend to focus on “attention grabbing” stocks. They find abnormal volume and returns attract buyers to a stock. Seasholes and Wu (2007) observe that daily price limits influence trading activity on the Shanghai stock exchange. Experiments by Das and Raghubir (2006) show that stock price trends influence perceived risk. Heath, Huddart and Lang (1999) report that when the stock price is above a one-year maximum, stock option exercise nearly doubles.
This paper provides clear evidence that technical indicators stimulate trading. We find a sharp rise in turnover as a stock crosses an n-day high or low and that turnover is increasing in n. This finding is robust to a number of controls, including market volume, returns, and news about earnings, dividends and analyst rating changes.
Our research extends Huddart, Lang and Yetman’s (2007) study of 52-week highs and lows to six additional time frames: 10-day, 25-day, 50-day, 100-day, 150-day, and 200-day. We document that trading volume increases significantly whenever price exits these trading ranges. Moreover, abnormal turnover generally increases in n. It is also persistently abnormal for at least two weeks.
The literature does show that this trading may result in positive returns. George and Hwang (2004) found that the 52-week high is a good proxy for Jegadeesh and Titman’s (1993) momentum factor. By calculating the trading imbalance and the percentage of the first time stock buyers, Seasholes and Wu (2007) found that Shanghai traders could profit from volume induced exuberance.
We find that George and Hwang’s result does not hold, either long or short, for a random selection of stocks not in the momentum portfolio. Following an n-day high, there is a strong one-day reversal, and returns are insignificantly different than zero thereafter. The returns following an n-day low cannot be explained by momentum. Traders should not, we show, short stocks hitting new lows. There are strong, persistent reversals with significant risk adjusted returns on long positions for up to 6 days following an n-day low.
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PDF Ebook Highs and Lows: A Behavioral and Technical Analysis
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