February 17, 2006, Newsletter Issue #6: What is Stock Technical Analysis?

Tip of the Week

Stock technical analysis focuses on historical price patterns and volume characteristics to predict the future. Strong fundamentals and technicals are usually a necessary condition for a stock to move higher. However, we believe looking at the fundamentals and technicals alone isn´t sufficient to effectively determine in which direction a stock will move.

Technical analysis is concerned with the history of trading and price in a stock. Technical analyst´s believe that a stock´s market price reveals all the known/needed information about the stock including public and insider information and investor sentiment. The founding fathers of technical analysis were Robert D. Edwards and John Magee who first published Technical Analysis of Stock Trends in 1948.

Technical analysis usually takes the form of charts and tracks a stock´s movements. Usually a pattern or trend emerges from a stock´s movement that allows a technical analyst to determine how the stock will likely behave in the future.

In 1995, Futures magazine rated the top five popular technical analysis techniques from a sample of 50 seasoned traders and analysts. The number one indicator according to popularity is moving averages, including moving average convergence divergence. Just behind moving averages on the list included breakouts (simple, channel, volatility), trend measurements (DMI/ADX), relative strength index (RSI), and stochastic/momentum oscillators.

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