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Unlike
Fundamental Analysis, which determines the value and economic strength of a business, a financial asset and
the economy by studying macro-economic indicators, Technical Analysis focuses on the price action of the market,
a commodity, security or currency. TA is a study of supply and demand and measures the emotions of the markets by attempting
to determine a trend measured by the support and resistance levels in various charting patterns established
by price action.
I've heard Technical Analysis described as everything from
a true Science to Voodoo akin to Astrology. However, as John Murphy, generally recognized as
the best known name in Technical Analysis explains, "Technical Analysis is the study of market action, primarily through
the use of charts, for the purpose of forecasting future price trends." I have
always viewed Technical Analysis as another tool in the investment toolbox, certainly not the toolbox itself. As a "top-down"
fundamental investor, I utilize TA as one of the many methods I use to confirm, support, disprove or eliminate my
fundamental investment thesis, but never to determine it. In my opinion, Fundamental Analysis defines the market, Technical
Analysis illustrates it.
For shorter-term
trades, technical indicators such as Relative Strength and Volume indicators, Bollinger Band and Volatility Squeezes, the
MACD Oscillator, Price by Volume Bars, and Stochastics, etc. are useful indicators For
longer-term investors, Technical Analysis can provide important insight as to prevailing trends, trend channels, support,
resistance, entry and exit levels, breakouts or failures of price supports and resistance levels. There have been countless books,
texts and articles written under the topic of Technical Analysis. I have read many of them and listed several of the
better works in the Investor Library.
In
my view, TA has become more of a catch-all phrase for any trading approach that utilizes charts, graphs and depicts price
action and movement in some illustrated form. Fibonacci, Elliott Wave, Trading Pairs, Japanese Candlesticks, Gann Angles and countless
other theories, systems and approaches to Technical Analysis exists. With the advent of computers, many computerized technical
"trading systems" have been developed for subscription by software companies for individual investors and currently
"black box" quantitative computer programs are used by hedge funds and based upon many diverse mathematical and
technical approaches to the markets.
Rather than attempting to explain the multitude of concepts, approaches
and indicators involved in Technical Analysis, I am going to provide readers with a basic understanding of my use of
TA as it applies to my investment methods, Investment Disciplines and investing approach. We will examine the basic technical
indicators and chart patterns I use in varying time frames and review the platform of a "default" basic chart
from www.StockCharts.com with the indicators and setting I use in basic technical chart analysis. My
application of Technical Analysis has been developed over thirty years of study, trial and error and continually adjusting or
"tweaking" my approach in the use of specific technical indicators that best fit my personal investment style
and methods. Generally, I divide Technical Analysis into two types: (1). Leading Technical Indicators or Oscillators
that signal a new trend or reversal before it occurs and (2). Lagging or Chart Pattern and Trendline Momentum Indicators that
signal a trend will stay intact or a new trend has already begun.
Yes,
I understand that Oscillators are also momentum based indicators. But for my simplistic approach, I categorize the indicators
by my time frame for their use. Indicators or Oscillators are more short-term and Chart Patterns and Trend lines are
longer-term patterns in my approach to investing. It's just my way of keeping them straight and how I approach them. After
you have worked them for a while see how they fit in your toolbox and in what time frame.
While rarely any factor in my sector selection and seldom a major aspect of my overall investment approach,
as a Fundamental Analyst TA does play an important role in my specific Investment Disciplines, particularly involving my methods
for shorter-term trading around established long-term core positions.
From a longer-term perspective, TA provides an excellent over view of the trends involved with specific markets or positions.
For example, trend lines and trend channels viewed from different time perspectives can provide very helpful insights
that help me formulate a longer-term opinion and investment plan for a market or a specific holding.
Other
technical indicators can also be helpful and provide traders and investors different perspectives depending
upon the "time frame" it is being viewed. Each technical indicator’s application and use varies
for me according to the time frame in which I am viewing the chart and my investment time frame involved with the position. I have often observed
that an opinion regarding any stock, a market or an investment holding without a time frame is no opinion at all. I believe
the same holds true in evaluating the effectiveness and usefulness of technical indicators. A trader, seeking to establish
a position for a short-term (a day to less than a week) trade, will utilize the exact same indictors I may use to establish
a long-term core position (from months to forever). We just apply and utilize the same technical indicators or technical patterns
in a different manner because of the differences in our time frames.
For example, as I add to a core holding by developing an additional position around it at a much higher level
than my original costs basis, I may utilize many of the same shorter-term technical indicators and Oscillators that would
be used by a trader. The difference, of course, is that I have the underlying core position that provides me with an "averaged
down" lower core cost basis and the underlying price support provides me with the ability to be more aggressive
with the position and have "cost protection" confidence should the position be hit by an unforeseen
market or exogenous event or a stock specific accounting, earnings or other event.
Let's begin by building our basic chart so as we discuss any position or market we are looking at it with the same chart
view. There are many stock charting services available but I have chosen www.StockCharts.com and the platform below shows my initial default settings I use in evaluating charts. The chart
indicators and the time frames can be changed to provide different technical information and time perspectives.
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