Technical Analysis

Friday, June 09, 2006

Technical Analysis

Technical Analysis

Technical analysis is basically the alchemy of charts. By arcane magical formulas technical analysts will tell you which way a stock is going to move. Take some Betas, Thetas, and Deltas, and stir in a pinch of worm warts, and poof the lead turns into gold. Ok, I admit I’m being a little sarcastic here. There really are some technical analysis basics which added to fundamentals will help you make good stock trades.

One is the moving average, stocks trading below their moving average are more likely to go up, all other things being equal.

Another is my primary technical skill, volume. Volume measurements shown on a chart will tell you how many people considering selling actually did, and how many buyers actually bought. It will also let you try to decide if the majority of people that own a stock are in above or below the current price. This generates “pressure” on the stock, if the majority can make a profit by selling now, this is downward pressure. If they can only make a profit (or break even) by it going up this is upward pressure. That’s the basic premise, but of course the really important thing isn’t on the chart. How many would like to buy it that do not own it currently, and how far will it go before it entices those waiting to show a profit to sell, are the really important questions. These “invisible” people are often driven by news and/or earnings, so once again fundamental research on news and earnings will put you ahead of the game, although just knowing about when they will announce earnings and making a speculative play on a stock you already like is rarely a bad idea.

I won’t go into too much depth on technical analysis as it really isn’t one of my greatest strengths, but there are some real things I see and use on charts that really are useful, one is “support”, or a price where this stock has shown a tendency to not go below over time. Buying it at or below support levels is often a good idea if the company is strong.

Last thing I’ll mention here is “head and shoulders” formations. Often, when you look at a chart you will see “formations” that look vaguely like a human head and shoulders, although the top of the head is usually very pointed (like a conehead). Anyway, there is something about the way the markets work that make this formation show up frequently, sometimes upside down, sometimes right side up. Making a play on this “information” is kind of a gut feeling kind of thing (at least it is for me), but it has paid off for me on occasion. There are probably some technical analysts out there who can tell you why this is so. Me, I don't know why it is so. I just know that it is.

If you want to know more, I'm in over my head here, consult the pros.

See the Latest and Greatest Books on Technical Analysis