Oh, boy, this should be fun…
Let’s kick off with a joke: an Oldie, but a Goodie.
A technical analyst sits down to dinner with a fundamental analyst who immediately knocks his knife off the table. It falls and sticks into his foot. The technical guy says ‘ouch that must have hurt, why didn’t you move your foot?’
The fundamental analyst answers: ‘ I expected it to come back up’.
While I’m hot:
An advisor calls a client and tells him he has some good news and some bad news. Murray tells him to give the bad news first. The advisor tells him that the stock they bought for his account has dropped in half. And the good news, Murray asks. Well, answers the advisor, the fundamentals are still good!
The discontent with Fundamental Analysis that the more sensitive amongst of you will have noticed came about in 2000 – 2002 when portfolio managers insisted as they came around to my office that ‘the fundamentals were still good’, or even better, I should have moved my clients out of their funds when trouble loomed. Well, that kind of call was not really my area. A diversified portfolio, in alignment with the clients’ goals and risk profile, of managed pools was.
I made it my business for the next number of years until in 2007 when trouble loomed I was able to take my clients to 100% cash as a discretionary portfolio manager. You see, I had learned that the market doesn’t give a fig for fundamentals. How far did Nortel fall, for example, generating buy recommendations all the way down?
In the interest of balance, let’s take a look at both. This is by no means a definitive study. I just want readers who don’t know to have a idea of the two sides.
The Fundamental Analyst looks at macroeconomic, microeconomic and business factors in order to determine the direction of a stock price. They will pore over financial statements until they have translated the value of a company to a stock price. Then if the market price is below their ciphering (you had to love Jethro), the stock was undervalued and they let out a mighty yelp and buy. If the market price was above their calculated price, it was too expensive, etc.
The thinking, of course, is that the market sooner or later will recognise the sheer genius of my ciphering, and act accordingly.
Technical Analysis as laid out by the Edwards and Magee in their seminal work, ‘Technical Analysis of Stock Trends’, first published in 1948. I think it is into its ninth edition:
‘ Technical Analysis is the science of recording, usually in graphic form, the actual history of trading (meaning price changes, volume, etc) in a certain share or commodity, etc. and then deducing from that pictured history, the probable trend’.
We can expand on that a little. The father of technical analysis is thought to be Charles Dow of Dow Jones fame. (interesting aside,the Edward Jones of the index is not a relative – or had anything to do with – of the Edward Jones that launched all the financial offices.)
Over the centuries that chart creation has been maintained in some form or other, patterns and shapes have repeated. This is not due to the great names of some of these patterns, but the battle between buyers and sellers, bulls and bears, supply and demand. Call the combatants whatever you want. It is the winners of that struggle that determine the rise and fall of market prices.
When the participants look to enter the fray and are girding their loins for battle, which side do they join? This is where that constant known as human nature arrives on the scene. It is human nature that causes the market to repeat: their fear and greed, their hopes and prayers and opinions all go into the market cuisinart.
The price and therefore the chart and its trends, support and resistance levels and so on are the average sum of everyone’s feeling or opinion about a particular market instrument.
All that is known and less known factors are reflected in the price and if good, the price will rise, and if they are bad, the price will fall.
The biggest aspect of Technical Analysis for me is the information on my chart is as pure as I am going to get it. It has not been through anyone else’s filter – for me, that is gold, Jerry!
If you are going to start trading, you could do no better than embracing the technical side of market analysis. You could do no better than taking a look at the books and videos that I have on offer at:
Maybe you could, but if you are a rookie,find a source that suits you and put in some work.
If you want other choices, I would be happy to send you my Book I at no cost. Drop me a line at firstname.lastname@example.org