Technical Analysis and the Real Economy: Is there a Link?

This paper demonstrates that a significant link exists between the real economy and financial conditions proxied by technical indicators. We show that technical indicators distill the high frequency information of asset prices into useful signals of future economic activity. In-sample and out-of-sample results reveal that technical indicators forecast coincident indicators as well as the Conference Board’s leading economic index and most of its components. Granger Causality tests support one-way causation from technical indicators to both coincident and leading economic indicators. Technical indicators further forecast financial stress, uncertainty, and recessions. Moreover, combining information from technical indicators and combination forecast methods lead to substantial gains in forecasting GDP including out-of-sample R statistics of 28% over the last 30 years and 42% during recessions. We show that technical indicators ‘work’ because they jointly forecasts both economic conditions and stock returns.