Sequential Greed and Fear in Stock Prices

Abstract

One ofWarren Buffett’s most famous quotes is “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.” This study seeks to test this statement by examining the sequence of advances and declines in prices against two artificially constructed benchmarks. To overcome the subjectivity criticism often inherent in technical analysis, a turning point methodology enables price patterns to be objectively defined. The findings indicate that some patterns appear to reliably repeat and may therefore be valuable in investing and risk management decisions.

TOPICS: Technical analysis, quantitative methods, VAR and use of alternative risk measures of trading risk