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1. Introduction
Islamic finance emerged as a new niche industry in the late 1970s as part of the Islamic revivalist aspirations and then gradually became part of even the Wall Street. Islamic finance is essentially an enterprise in trying to organize and conduct the financial aspects of life in accordance with Islamic guidance. While Islam provides comprehensive guidance for life, in its current phase of development, Islamic finance industry is Shariah-compliant in the sense that it is “prohibition driven” (El-Gamal, 2006, pp. 8-11) or based on avoidance of certain key prohibitions in Islam: Riba (generally blanketly equated with interest), Gharar (avoidable uncertainties exposing one or more parties to excessive risk) and maysir (gambling or pure/excessive speculation).
As part of development in Islamic capital markets, during 1999, Dow Jones launched a number of Islamic market indices. Dow Jones Islamic World Index, Dow Jones Islamic Market USA Index, Dow Jones Islamic Market Asia/Pacific Index and Dow Jones Islamic Market Index were introduced in May 1999, while Dow Jones Islamic Market Titans 100 Index was introduced in 2009. These indices with distinct focus – from global to regional – apply Shariah screening and the securities included must be based on the Shariah compliant screening.
Considerable literature has emerged dealing with these indices from the perspective of fundamental analysis (FA). However, there is hardly any work that has explored these indices from the perspective of technical analysis (TA). In this paper, we apply some basic tools of TA to Dow Jones Islamic Market US Index (IMUS) in comparison with the three major market indices: Dow Jones Industrial Average (INDU), Standard and Poor’s (S&P) 500 Index (SPX) and NASDAQ 100 Index (NDX). For TA, we apply moving averages (MAs), moving average convergence divergence (MACD) and Stochastics as indicators, the latter two being oscillators that identify overbought or oversold conditions. In this paper, we essentially deal with the following questions:
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Can and does TA predict movements in Islamic indices similar to conventional indices?
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Does TA provide better results than a simple buy and hold “Buy-and-Hold” (B&H) strategy for Islamic indices based on FA?
The comparative analysis indicates that the performance of Dow Jones IMUS based on FA can be improved with disciplined application of TA. This paper also considers some Shariah...