Sam Collins

The Art of Technical Analysis

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The analysis of common stocks for the purpose of buying and selling the "right stock at the right price" has been going on for almost 200 years. During that time, two very different types of analysis have developed -- fundamental and technical.

Fundamental Analysis

Basically, fundamental analysis depends upon statistics. The fundamentalist studies a company's profit-and-loss statements, quarterly balance sheets, auditors' reports, dividend records, sales data, management ability, products, the competition, etc.

After all of this, he compares this data with the data on other companies and the market, and decides what the stock is worth. If the current price is under his evaluation he buys, and if it's over it he sells.

Technical Analysis

Technical analysis is the "study of the action of the market itself," which depends upon the accurate recording of mounds of data, transferring it to chart form, and then deducing from the pictured history the probable future trend of the stock.

The technician argues that there is no such thing as an "intrinsic value" of a stock, and that the price is determined solely by supply and demand.

The price may be influenced by fundamental factors, but there are other factors that are more complex. They include the emotions of hope and fear, and the irrational and rational actions of thousands, perhaps even millions, of buyers and sellers. And it includes their needs and resources -- factors beyond the ability of the most powerful computers to precisely assign a value.

The technician would say that there is but one true value of a stock, and that is the price most recently recorded, because it takes into account all of the factors mentioned and is determined in the free marketplace by buyers and sellers.

And since prices move in "trends," the technician studies those trends for patterns that have historically either terminated a trend or established a new trend. Chart patterns and formations, and support and resistance levels are studied, and the result is the prediction of probable new patterns and price objectives.