. In the absence of compelling empirical data to support technical analysis, whi
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Question
. In the absence of compelling empirical data to support technical analysis, which of these arguments supports its use? A. The Dow Theory has a long history of successful use and has earned respect in nonacademic circles. B. Traders of odd lots tend to be smaller, less sophisticated investors who reliably make the wrong investment decisions. C. Emotions lead to irrational investment decisions that can be overcome by applying a strict set of technical methods. D. Several technical methods capitalize on empirical data supporting the contention that security prices move in the same direction.
Explanation / Answer
Solution.
In the absence of compelling empirical data to support technical analysis,
C. Emotions lead to irrational investment decisions that can be overcome by applying a strict set of technical methods.
The hypothesis of market efficiency and the use of technical analys is are diametrically opposed in their implications, yet remarkably similar in their foundation. Both recognize that prices generally reflect all information about a stock, but one uses this recognition to argue that prices cannot be predicted while the other uses the same recognition to argue that prices reflect trends in investor sentiment that can be predicted. Clearly, both cannot be correct.
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