Sunday, March 4, 2012

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!

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