Ask Colin

Does data adjusted for dividends affect technical analysis?

The detailed question was:

I am trialling new charting software that pulls in end of day data from Yahoo Finance. The Yahoo data is adjusted for both splits and dividends.  Up until now I have always worked with actual data adjusted only for splits.   I am curious as to the impact of the use of adjusted data versus actual data on technical chart analysis as it is clear from initial observations that in the case of adjusted data lines of support and resistance can be significantly different and troughs used to establish sell stops drift lower over time as  new adjustments are taken up.  Preliminary research would appear to indicate some ambiguity over the issue. 

I have already touched on this issue several times in Ask Colin/Dividend. Here is a further discussion:

I agree that there is much dispute in this area.

The data I use is adjusted only for corporate actions (all corporate actions, not just splits) and special dividends, which are effectively capital returns.

However, I do not adjust for ordinary interim dividends, final dividends and special dividends that are not capital returns. Most special dividends are simply a way to pay an extra dividend in one year and revert to a small increase on the normal dividends in the next year, so it looks like dividends keep increasing.

The problem I see with adjusting for ordinary dividend is how to logically do it because notionally part of the next dividend is in every price going forward.

The other issue with dividends is that  if you adjust for a dividend, then you should logically adjust for the franking credits as well - i.e. adjust for the grossed-up dividend? 

If you are stuck with adjustments for ordinary dividends, all you can do is to stay aware of them and when they interfere with analysis, try to take them into account.

Personally, I would not use software using data adjusted for dividends.