Technical Analysis Vs Stocks…is There A Connection?

Posted on July 16, 2008
Filed Under Share Trading |

Trying to figure out what any stock, at any given time in the world will do, as far as price movement up or down can be daunting. Well, to help with this quandary there are two different methodologies used. However, the one that has proven most reliable over many decades has been that of fundamental analysis.

The school of fundamental analysis looks at the companies financial prospects, whether the desired results are achieved, and how it stacks up to the competition. Alternately, technical analysis has been used due to its success even though it is primarily unscientific. Well, what’s the connection regarding both stocks and technical analysis?

If you can believe it, technical analysis is simply the studying of past market trends to make a determination as to what the future of the stock’s price is going to be. But, that still doesn’t answer the whole question - what is the whole connection between technical analysis and stocks? More importantly, how can people think they can predict the price of a stock from looking at charts and graphs and not the financial health or condition of a company?

Some of this stems from technical analysis being used by market analysts who can downgrade stock or anticipate higher earnings. Trading stock is influenced not only by the markets daily swings or isolated events, but actually how markets move with time and the fallout from some of these events are cumulative, therefore experienced over time periods.

As a result, technical analysis utilizes tons of data including old stock quotes, trading volume charts, and a host of other data, to develop charts and graphs that work to determine exactly how long the impact of a move in a company will persist and impact the stock market trading of a particular issue.

In many cases, a side by side comparison of a fundamental analysis and a technical analysis of the same stock market issue have yielded results in which the technical analysis has been more able to predict the short term ebbs and flows of a particular company. However, the fundamental analysis works on a longer term basis, and so the technical analyst has earned a reputation of being a “short” predictor rather than a “long” predictor in the markets.

Technical analysis is much more difficult to explain to the layperson due to the incessantly large amount of jargon involved, much of it to describe shapes in graphs and trend lines that exist. An elbow, or a shoulder, or a host of other terms can all be used to describe the same trend in a graph (in this case, a level market, followed by a steep drop, and another leveling off) which can confuse and put off the typical investor from investing in a company.

Ultimately, many in the investment community are still asking the question “What basis can we make the connection between technical analysis and stocks?” in terms of how that type of analysis can be instituted for everyday use. The reality is, technical analysis is imprecise, open to wild interpretation in some cases, and ultimately serves the purposes of the people that use it. However, given the level of success with the tool, it’s unarguable that technical analysis can be a legitimate market analysis tool.

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