Which form of the Efficient Market Hypothesis (EMH) believes in technical analysis?

The correct answer is rooted in the understanding of the Efficient Market Hypothesis (EMH) and the limitations of various forms. The weak form of EMH posits that all past price information is already reflected in current stock prices. As a result, it maintains that technical analysis, which relies on historical price and volume data to predict future price movements, is ineffective. This form of EMH suggests that market participants cannot achieve superior returns by analyzing past market trends or patterns.

In contrast, the semi-strong form expands this idea to include all publicly available information, thereby asserting that neither technical analysis nor fundamental analysis can provide an edge in predicting stock prices. The strong form goes even further by suggesting that all information, public and private, is reflected in stock prices, effectively negating any advantage from insider trading or any form of analysis.

Understanding these nuances is crucial for grasping why the weak form is directly associated with the ineffectiveness of technical analysis, while the other forms eliminate the possibility of achieving excess returns through even more extensive market analysis strategies.