A Decision Support System for Technical Analysis of Financial Markets Based on the Moving Average Crossover

The Moving Average (MA) crossover technique is one of the popular technical analysis tools used by investors in financial markets. The technique depends on identifying the lengths of short and long time periods, type of MA model and type of price data on which the analysis is to be based. Unfortunately, most users base their selection of these parameters on recommendations which could be not suitable for a particular market or security. Also, technical analysis software do not provide a tool through which a search for the best (optimal) rule that generates the highest return could be reached. Technical analysts recommend that users fine tune these parameters according what they see suitable for their strategy. Accordingly a decision support system was developed based on the MA crossover technique that is capable of providing descriptive statistics for the time series data of market indices and securities, evaluating the statistical significance of returns generated by any MA rule, searching for the optimal MA rule that generates the highest significant returns and scan among a group of securities for the latest signals and highest returns. The system has the added of advantage of searching for the optimal MA rule among a large universe of MA rules. The DSS system was used to investigate the predictive capabilities of the MA crossover with respect to the Egyptian Exchange Stock market. The lengths of 1-20, 1-25 and 1-30 along with the closing price emerged as the most profitable for the rules. The exponential MA model dominated as the most profitable model for many securities, while the simple MA model was effective for a few securities. The results obtained provide strong evidence that the MA crossover technique can predict the Egyptian stock market index and its securities and reject the null hypothesis that the returns earned by the technique are equal to the unconditional buy-and-hold strategy. Therefore, there could be great opportunities from applying this technique to the Egyptian market for yield enhancement and portfolio diversification.