Market efficiency and the returns to technical analysis

We further investigate and provide interpretation for the intriguing Brock, Lakonishok, and LeBaron (1992) finding that simple forms of technical analysis contain significant forecast power for US equity index returns. We document that the forecast ability is partially, but not solely, attributable to return measurement errors arising from nonsynchronous trading. We argue that the evidence supporting technical forecast power need not be inconsistent with market efficiency. "Break-even" one-way trading costs are computed to be 0.39% for the full sample and 0.22% since 1975, which are small compared to recent estimates of actual trading costs.