Technical vs Fundamentals
Technical analysts and fundamental analysts are often defensive of their own analyst style and it is often difficult to find people who are proponents of both styles of analysis.
Investment Banks, brokerages and market tipsters have long produced recommendations on stocks. Their recommendations are usually based on the fundamentals of the company, that is, the public information about the companies business activities, financial strength, management, future strategy and acquisitions just to name a few. The analyst, or writer of the recommendation, will use this information to give their opinion of the value of the share price. Based on the current price of the share, they will then give their recommendation.
Technical analysis of a share occurs when the analyst examines the historic share price of a share. The basis of technical analysis is the underlying theory that markets discount information and they begin to move before the fundamental information is released. Technical analysis also provides a picture of the market’s psychology, that is, a picture of the market’s fear and greed concerning a stock. From these price movement chart patterns, technical analysts believe they can predict future price movement.
Technical analysts and fundamental analysts are often defensive of their own analyst style and it is often difficult to find people who are proponents of both styles of analysis. Fundamental analysts claim that future activities of a company cannot be predicted from past price movement. Technical analysts claim that fundamentals are ultimately reflected in the stock price anyway and future fundamental changes to a stock can be seen from more knowledgeable investors who begin to buy or sell a stock before the fundamentals of the company are widely known.
It is interesting to note that both types of analysis often differ completely in opinion. It is not uncommon for an analyst at one brokerage firm to have a buy recommendation on a stock and for another, at a different firm, to have a sell recommendation. Similarly, one technical analyst may say that the ‘double bottom’ on their chart makes the share a buy, whereas another technical analyst may say that the ‘evening star’ that has formed on the stock makes the company a sell.
In either case, the analysts of both varieties will continue to pour out their opinions to the masses. If nothing else, the existence of so many opinions creates liquidity for those who still prefer the dartboard.
Thursday, April 17, 2008,
Lord Spalding