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Unit 10: Technical Analysis

Fundamentalists study the cause, not the “should.” They make their decisions on quality, value Notes
and depending on their specific investment goals, the yield or growth potential of the security.
They are concerned with the basis, the corporation’s financial strength, record of growth in sales
and earnings, profitability, the investment acceptance and so on. They also take into account the
general business and market conditions. Finally they interpret these data inductively to determine
the current value of the stock and then to project its future price. Fundamentalists are patient and
seldom expect meaningful profits in less than one year.
In the long run, the fundamentalist who selects quality stocks when they are undervalued and
sells them when they become fully priced will make substantial profits. But as John Maynard
Keynes often noted, “In the long run, we’ll all be dead”.
Compared with long-term investors, technicians seek to keep their money working as profitably
as possible at all times. When trading, they want to score profits quickly, and if the stock to
market does not perform as anticipated, they are willing to take a small, fast loss.
Technically-oriented investors start by checking the market action of the stock. If it is favourable,
they examine the fundamentals to be sure the company is sound and profitable. At all times,
their focus is on the market, generally, on the performance of all listed stocks; specifically, on
the price/volume movements of the stock they are considering buying. They make their decisions
based on technical, not fundamental, data.

Technicians believe that (1) the stock market is rooted 15% in economics and 85% in psychology;
(2) The record of past and present performance of a stock, not necessarily of the corporation, is
the key factor; and (3) stock market dominated by institutional investors, operates on the wolf
pack theory of following leaders. When major money managers start to buy, regardless of the
reason, the price of the stock will go up. When they start to sell, it will go down. All such moves
are shown by technical indicators.
In more detailed terms, here are several ways the technician acts:

1. Technicians believe that behind the fundamentals are important factors: At any given
time, some investors have gains in the stock, and some usually have losses. Those with
gains want to safeguard them and if possible, build them higher, they will hold the stocks.
Those with losses will adopt different tactics; some will cut their losses short by selling
out early when the stock price begins to decline others will sell when a minor rally has
moved the stock up to their cost price; and still others will hold on doggedly until there is
a turnaround.
Each of these decision points can be spotted on charts: current configuration to show the
action of the past week or so; intermediate and long-term patterns to find the previous
important price levels at which selling is likely; and interim and long-term high points
from which the stock started to move down in the past. In this method of analysis, a vital
factor is volume. Volume is favourable on the upside when the number of shares traded is
greater than before and on the downside when the number of shares traded dwindles.
Volume is unfavourable when volume dips as prices rise or increases when there is a
decline. None of these indicators is concerned with the fundamentals of the corporation.

2. Technicians act on the what not the why: They recognize that formations and patterns
signify changes in real value as the result of investor expectations, hopes, fears, industry
developments and so on. They are not as impressed with fundamental value of any security
as they are with current and prospective values reflected by market action.
3. Technicians are not committed to a buy-and-hold policy: As long as the trend is up, they
will hold a stock. This may be for months or even years. But if there is a reversal, they will
sell within hours of purchase. They recognize that, to achieve the greatest gains, they must

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