laid the foundation of ``the Dow Theory'', the first theory of chart readers. The theory is based on editorials of Charles H. Dow when he was editor of the Wall Street Journal in the period 1889-1902. Robert Rhea popularized the idea in his 1930s market letters and his book ``The Dow Theory'' (1932). Although the theory bears Charles Dow's name, it is likely that he would deny any allegiance to it. Instead of being a chartist, Charles Dow as a financial reporter advocated to invest on sound fundamental economic variables, that is buying stocks when their prices are well below their fundamental values. His main purpose in developing the averages was to measure market cycles, rather than to use them to generate trading signals.
After the work of Hamilton and Rhea the technical analysis literature was expanded and refined by Richard Schabacker, Robert Edwards and John Magee, and later by Welles Wilder and John Murphy. Technical analysis developed itself into a standard tool used by many to forecast the future price path of all kinds of financial assets such as stocks, bonds, futures and options. Nowadays a lot of technical analysis software packages are sold on the market. Technical analysis newsletters and journals flourish. Every bank employs several chartists who write technical reports spreading around forecasts with all kinds of fancy techniques. Classes (also through the internet) are organized to introduce the home investor in the topic. Technical analysis has become an industry on its own. For example, the questionnaire surveys of Taylor and Allen (1992), Menkhoff (1998) and Cheung and Chinn (1999) show that technical analysis is broadly used in practice. However, despite the fact that chartists have a strong belief in their forecasting ability, for academics it remains the question whether it has any statistically significant forecasting power and whether it can be profitably exploited also after accounting for transaction costs and risk.
Cowles (1933) considered the 26-year forecasting record of Hamilton in the period 1903-1929. He found that Hamilton could not beat a continuous investment in the DJIA or the DJRA after correcting for the effect of brokerage charges, cash dividends and interest earned when not in the market. On 90 occasions Hamilton announced changes in the outlook for the market. It was found that 45 of his changes of position were unsuccessful and that 45 were successful. In a later period, Alexander (1964), and Fama and Blume (1966) found that filter strategies, intended to reveal possible trends in the data, did not yield profits after correcting for transaction costs, when applied to the DJIA and to individual stocks that composed the DJIA. The influential paper of Fama (1970) reviews the theoretical and empirical literature on the efficient markets model until that date and concludes that the evidence in support of the efficient markets model is very extensive, and that contradictory evidence is sparse. From that moment on the efficient markets hypothesis (EMH), which states that it is not possible to forecast the future