“In the course of years of stock market study, two quite distinct schools of thought have arisen, two radically different methods of arriving at the answers to the trader’s problem of what and when.  In the parlance of ‘the street,’ one of these is commonly referred to as the fundamental or statistical, and the other as the technical.” [Technical Analysis of Stock Trends, Edwards & Magee]

Technical analysis is the study of the action of a stock or index in terms of its price movement and volume of transactions, often recorded in graphical form, to determine from that the probable future trend.  More than anything else, technical analysis (TA) is based on one principle.  The markets discount everything.  Technical Analysis of Stock Trends (the “bible” of technical analysis) later states,

“Because they reflect the combined market activities of thousands of investors, including those possessed of the greatest foresight and the best information on trends and events, the Averages in their day-to-day fluctuations discount everything known, everything foreseeable, and every condition which can affect the supply of or the demand for corporate securities. Even unpredictable natural calamities, when they happen, are quickly appraised and their possible effects discounted.”

It is the job of the technical analyst, armed with this knowledge and with an understanding of how to interpret this data, to deduce from the action of the market the most likely direction of the coming trend and the most appropriate buy and sell points.  Over the years, many have come to regard fundamental analysis as the only viable long-term strategy for investing.  We believe that this point of view limits the investor and places undue faith in the market’s ability to bring the undervalued stock back to fair value in a timely fashion.  The art of investing is the study of three things: the economy, companies, and people.  Fundamentalists place all of their emphasis on the first two, completely disregarding the most powerful factor in determining the price of a stock.

Technical analysis is, in effect, the study of people’s impact on stock prices.  The trader is the person who decides to use these techniques to profit in the stock market.  While the long-term investor frets over the market that moves up and down in a trading range that in the end leaves him with little or no gains, a skillful trader can turn over his money several times.  In the above example of the ’62-’74 DJIA, simply buying and selling three times so as to stay out of the market for the worst 5 of the 13 years, would allow the trader to keep profits of as much as a 300%, while the long-term investor is left with no returns over the same period.  As we leave the bull market of the ‘90s behind us and move into a new era of rising and falling markets, the advantage will go to the trader, as many buy-and-hold investors will find themselves in 2010 with roughly the same portfolio in “real” terms that they had a decade before.

          · Executive Summary              · 2000 - 2001:  Look Back               · The Market Moving Forward          

             · On Technical Analysis and Trading         · Market Calls Performance          · Acknowledgements