TECHNICAL ANALYSIS RATIONALE

Why would someone rely on just studying charts that plot past and current

price and volume information, as well as perhaps technical indicators or

formulas that use the same information?

The reasons are found in observations of the stock market, as first

noted by Charles Dow in this country and can be described in three ways.

1. Efficient Market. Over time, market prices reflect everything that

can be known about a stock and its future prospects. The market as

a mechanism is very efficient at discounting whatever can affect

prices. Even unforeseen events, such as new competition, legal or financial

problems, a company takeover, the death of a founder, and

so on are quickly priced into the stock. Even unknown (not yet

publicized) fundamental factors, such as a sharp earnings drop, are

seldom unknown or unanticipated by everyone; those who know

often act on the information, and selling volume starts to pick up

on rallies. Here I am not talking necessarily about facts known only

by company insiders. There are traders, investors, and analysts outside

a company or an industry who see changes coming, through astute

observation and sharp analysis.

2. Trends. The information about a company’s stock and its future

earnings prospects that are reflected in the stock price will also be

reflected in a price trend or tendency to go up or down. Trends are

not only up or down, but sideways as well or what is sometimes

called a trendless pattern—I consider a sideways movement to be

the third trend possibility, for example, a stock moves between 40

and 50 multiple times. A trend is the action of a body in motion

staying in motion until an equal countervailing force occurs.

3. Reoccurrence. Price trends occur and reoccur in patterns that are

largely predictable. The idea of trends reoccurring is that history repeats

itself. If there was abundant stock for sale (supply) previously

for sale at 50 and that selling caused a retreat in prices, it may well

be the case again when the stock approaches this level again. If it

doesn’t, that tells you something also, as demand was this time

strong enough to overcome selling.

The basic technical analysis rationale can be remembered by the ETR

acronym (as in Estimated Time of Arrival). Well, you can estimate arrivals

Source:-ESSENTIAL TECHNICAL ANALYSIS

by-LEIGH STEVENS

with technical analysis!