H E C K ☞ QUESTION 1 a. Suppose you observed that high-level managers make superior returns on investments in their companys stock. Would this be a violation of weak-form market efficiency? Would it be a vio- lation of strong-form market efficiency? b. If the weak form of the efficient market hypothesis is valid, must the strong form also hold? Con- versely, does strong-form efficiency imply weak-form efficiency?         12.2 IMPLICATIONS OF THE EMH FOR INVESTMENT POLICY   Technical Analysis   Technical analysis is essentially the search for recurrent and predictable patterns in stock prices. Although technicians recognize the value of information regarding future economic prospects of the firm, they believe that such information is not necessary for a successful trading strategy. This is because whatever the fundamental reason for a change in stock price, if the stock price responds slowly enough, the analyst will be able to identify a trend that can be exploited during the adjustment period. The key to successful technical analy- sis is a sluggish response of stock prices to fundamental supply-and-demand factors. This prerequisite, of course, is diametrically opposed to the notion of an efficient market. Technical analysts are sometimes called chartists because they study records or charts of past stock prices, hoping to find patterns they can exploit to make a profit. Figure 12.1 shows some of the types of patterns a chartist might hope to identify. The chartist may draw lines connecting the high and low prices for the day to examine any trends in the prices (Figure 12.1, A). The crossbars indicate closing prices. This is called a search for "mo- mentum." More complex patterns, such as the "breakaway" (Figure 12.1, B) or "head and III. Equilibrium In Capital Markets 12. Market Efficiency The McGraw−Hill Companies, 2001           344 PART III Equilibrium in Capital Markets