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What's The Connection? Stocks And Technical Analysis

Jul 16, 2008
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.

This type of analysis looks at the financial prospects of a company, and then looks at their chances of achieving desirable results compared to its competition. On the other side of the fence, there are some in the school of thought involving technical analysis, a largely unscientific but seemingly successful school of thought as well. So, what exactly is the connection between technical analysis and stocks?

Simply put, technical analysis studies past trends in the market. These trends are then used to help figure out what a future of a stock's price may be. However, this entire question with regard to the connection between stocks and technical analysis is still unanswered. What allows people to think that the price of stocks can be predicted by just looking at graphs and chart? Doesn't the companies overall condition and its financial outlook help in determining or predicting stock prices?

Well, part of the reason that technical analysis is utilized by some market analysts is that, although one would think that statistically speaking a trading day on the stock market should only be influenced by that day's events and treated like an independent event, the reality is that most market movement trends over time and the full impact of one event (a downgrade of the stock by an analyst or a movement of earnings higher than expected by the same analysts) is never isolated to one day.

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.

Due to complexity of the language and terminology used technical analysis can be quite off putting to laypeople who may not understand this verbiage. Since graphs and trend lines involve this terminology and it can sometimes be ambiguous. Many different terms can be used to denote the same trend on a graph and this can cause confusion of the typical investor who may want to invest. For example, a shoulder or an elbow can denote the same thing in a trend on a graph. Talking about leveling and drops in regard to market fluctuations can be quite intimidating to a general investor.

In conclusion, the question still remains, \"What's the connection between technical analysis and stocks?\", how is it determined and on what basis? How can these tools be used daily and made easier to comprehend. Although, technical analysis is not as accurate and can be very subjective, it has been successful so it makes it hard to dispute that it is still a viable tool used in market analysis.
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