Technical Analysis (TA for short) is one of the three major forms of investment analyses.  Here’s what it is:

Technical analysis is a major school of investment analysis that attempts to identify opportunities by analyzing the market’s physical behavior, such as price movements, price patterns, and volume.

Some people say TA is a Hokey Religion that has no place in investments.  From the outside it’s just a bunch of lines and indicators based on previous price movements.  It supposed to predict where the stock will go based on where it has been.  Oh, and it’s all subjective.

Let’s look at the TA “Rock of Gibraltar” known as the 200 day moving average:

How in the world is a 200 day moving average even financially significant?   And to answer that: it isn”t!  There is no real financial significance to that TRAILING IMAGINARY LINE.  People only see it as a significant marker because they believe OTHER investors see it that way.  And those investors only see it that way because they have the same thoughts on the matter.  The concept is really DUMB, but unfortunately that’s how it works.  So the occurrence of when a stock nears its 200 day moving average, bounces off it, and/or crosses over it is only significant because MANY investors BELIEVE it is significant.  It’s essentially becomes a self-fulfilling prophecy.

You can hand me case studies and research showing me the financial significance of a 200 day moving average but in the end, to me it’s just an imaginary line.  I can argue the same for the financial significance of BACON on the markets.  Everyone knows that BACON makes everything better.  As you can see in the picture below, BACON was the reason why the markets rebounded in March of this year.

So the answer is “Yes”.  TA is a Hokey religion.  Now that we have established that, does TA belong in the market?  The answer to this is a profound: Heck yea it does! I know some folks that won’t touch TA even with a 12-foot pole.  Even though you don’t follow this form of analysis, I think you should still respect it.

Here’s why TA deserves some respect:

Decisiveness

Technical analysts have specific entry points and will already have an exit strategy before entering a position.  It’s a very concise form of investing.  The kryptonite to a technical analyst would be “discipline”.

So easy a caveman can do it

Technicians don’t need to delve into financial statements, understand how the economy works, and to be honest, don’t even need to know what the company does.

Works in ALL types of markets

Technicians can profit from up, down, and sideways market conditions.  Heard of channel trading?  That’s all TA.

Universality

Technicians can use their same methodologies to invest in any market.  FOREX, options, futures, micro-cap, etc.

A verification of Fundamental Analysis

Often times, one type of analysis is not enough to pull the trigger.  There’s nothing greater to have made a fundamental judgment and the TA supports your conclusions.

Fortune telling

Technical Analysis can see market tops and bottoms BEFORE Fundamental Analysts.  (*different from market timing)

Like I mentioned in an earlier post about Fundamental Analysis, my goal is not to make everyone traders, but to be BETTER investors.  Even if your portfolio is professionally managed, NO ONE will look after your money better than YOURSELF.  Definitely look into TA if you have a discretionary account that you deal with or intend on taking a more proactive approach to investing.  It’s definitely not for everyone, but everyone should be well acquainted with it.  Many fund managers, market makers, pit traders, and day traders make their decisions based off of TA.  I myself, include it in my hybrid due diligence.

What are your thoughts on Technical Analysis?

Happy Hunting!

Photo Credit: Charts are from BigCharts.com

Photo: D’Arcy Norman

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1. Stock Investing; Fundamental Analysis Demystified
2. Decrease Your Technical Analyses to 2 Minutes or Less