Technical Analysis
Posted by Gail | Filed under Uncategorized
The transition seems to have gone smoothly. Thanks for your patience. If you didn’t get to read yesterday’s blog, go have a peak. Hugs to Indy who no doubt busted her butt all day yesterday and deserves a shout out. Kisses, m’girl. You ARE appreciated.
Rather than looking at a company’s business, financials and operations, some investors like to focus on the historical performance of a stock, and the patterns created when it’s price and volume are charted over the long term. Referred to in the biz as technical analysis, this is an industry unto itself. There are uptrends and downtrends, support and resistance, breakdowns, breakouts and countertrend retracements. There are daily charts, weekly charts and charts that plot a stock’s history. And if you want to take this approach to investing, you’re going to have to buy a book or six to learn about technical analysis.
One reason why technical analysis is popular is that the charts created offer basic supply and demand information about a stock, eliminating the opinion component of most stock discussions. This form of stock picking is therefore seen as unbiased.
Charting also helps to put a stock’s behaviour in context. Is that big point move a breakout, or simply a continuation of a strong advance? Proponents hold that by keeping your eye on the charts, you can identify stocks that are about to break out big-time. And they are a great signal of when to sell. A stock’s chart will often show early warning signs well before the company actually falls apart. If there is heavy volume selling for several days, you can bet there’s something wrong. (Or was that just more investor over-reaction?)
The detractors of technical analysis will tell you that while it is purported to be unbiased, it is often up to the person doing the analysis to interpret the significance of the ‘fuzzy” information provided on those multitudes of charts. Besides, since the information used by charters is available to anyone who wants it, how can there be any real advantage to this approach?
If you’re a top-down investor, you’ll begin your analysis by first looking at the broad economic picture, narrowing your focus down to industry sectors, and then individual companies. So, if you believe that oil prices will drop, you might look to industry segments that use oil and analyze these segments to see how this economic change will affect their performance. Within the sector, you’ll then analyze other criteria — perhaps labour or competition issues — to see how they might affect individual companies. Finally you’ll look to P/E ratios and the other financial formulae.
If you’re a bottom-up investor, you’ll be less concerned about the overall state of the economy and will focus more on the fundamentals of individual companies. So you’ll start with P/Es and pull back to look at how the whole sector is doing, and what the economic picture as a whole is like.
Next week: Types of Stocks
Last week: Investing for Growth
August 17, 2010 at 6:47 am
Nice to see your blog back Gail. How much time and effort should it take to do these technical analysis of a stock? I foresee it taking some time, which of course I don’t have. I could be wrong and need to read a book or 6 on the subject. I don’t see myself investing in this way.
regards,
Jason
August 17, 2010 at 9:25 am
There might have been a time that I would have delved right into this but not any more. This is what I pay my financial management company to do and they’re doing a good job. When I go to Chapters I’m not likely to hit the financial section – much prefer more easy reading.
August 17, 2010 at 9:38 am
@Jason My father spends at least 30-50 hours a week on it. He believes that the right combination of chart information will accurately predict where a stock is going.
My feeling is that if there is a magical chart that would make people money, everyone would be making money.
August 17, 2010 at 9:55 am
@Indy,
Thank you very much to have done this transition so quickly. She is right Gail You are very very appreciated.
Christine
August 17, 2010 at 4:34 pm
What a relief to see the blog back “live”. Indy you rock!
This technical analysis seems to be floating right over my head right now. Usually I read the blog when I’m fresh, first thing in the morning, but by this point in the day, woh-nothing is sinking in. I think I have a good financial advisor to advise on such matters, thank goodness
August 17, 2010 at 11:54 pm
i’m sorta between jason & everyone else. i pay a financial advisor & everything seems to be as it should be. though i visit at least once every 6 months to keep an eye on my investments and make sure i’m still comfortable with my decisions, i could use an extra 20 hrs this week and next and the one after that to educate myself further on this topic.
the reality is, i rely on my FA quite a bit. we have many years behind us and i truly do trust him. if i didn’t we wouldn’t still be together in a financial relationship.
i do want to thank you gail for this kind of information. it always gives me something to think about & often i ask follow-up questions when i visit the FA, or i’ll shoot off an email. it’s good to have more knowlege (knowledge is power!) and when i feel in control, i am much calmer about my $$$$. my situation may not be ideal at the moment but with every day i feel i make another small advance toward debt free and saving more. baby steps…
August 18, 2010 at 10:02 am
One of the great truisms of the stock market is that if everybody starts to adopt a similar way of picking stocks, the laws of supply and demand catch up and those methods are no longer popular (for example, the famous Dogs of the Dow approach that was at one time profitable, but because every mutual fund company now has it as one of their products, its more difficult to be profitable with it).
For now at least, and it may change within seconds of this comment being posted, passive “couch potato” investing will be fine for most people by investing in various indices. If you want to dip your toes into the pool of active stock picking, stick with the fundamentals of a company first (growing earnings, low debt, etc.) Some people use technical analysis to time the entrance into the stocks you picked earlier, but for most people, that may not be necessary.
August 18, 2010 at 1:37 pm
gack!
Top down? Bottom up?
I trust my financial advisor to understand my risk tolerance and my lack of patience in participating in the minute desision making — then let her tell me what to invest in — with an annual review. I drop $200/mo and my diversified funds do the rest. I seriously doubt that is the BEST strategy (it looks tragic the last few years), but it’s all I’ve got the time or inclanation for at this point in my life. I really am afraid that if I dabble, then it will be one of those situations where a little knowledge is dangerous… and I don’t ever plan on being an expert at it.
My plan is not to get rich quick, but to prevent being poor and live as securely as I can — now and for the future. The most time I spend with my money is on the budgetting and planned spending tasks… we are debt free (except our small mortgage) so it must be working.
August 20, 2010 at 10:42 am
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August 24, 2010 at 7:23 am
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December 16, 2011 at 2:41 pm
[...] Gail Vaz-Oxlade Making Money Make Sense. Technical analysis. “Rather than looking at a company’s business, financials and operations, some investors like to focus on the historical performance of a stock, and the patterns created when its price and volume are charted over the long term.” [...]