Technical Trading 101
Here's something interesting I came upon...I generally only invest in a stock for fundamental reasons or if I feel it's undervalued, but this sheds new light on the market:
From Stockjungle.com's Jungle Weekly
* IN THE SPOTLIGHT *
We all know by now the story of Peter Lynch buying all kinds of pantyhose at the grocery store to take back to his wife for a homespun evaluation, a process that led to his
tremendously successful investment in Leggs, the company
that made the first disposable pantyhose. The investment
strategy Lynch was advocating was simple -- buy what you
know.
That strategy fits squarely in the box of fundamental
analysis -- looking at what a company does and how it does
it. That investment strategy continues to be a powerful
approach to picking stocks. Eventually, though, the more
active investor, as they watch their newly purchased stock
immediately fall in price, begins to wonder if there might
not be some value in understanding the mechanics of the zigs and zags of the stock charts. This is not a new quest, it can be traced all the way back to investors who speculated on the price fluctuations of the rice market in 17th century Japan. Technical analysis, as it is called, is the study of the action of the market itself as opposed to the study of the goods in which the market deals.
There are now thousands of investors, both professional and
non-professional, who practice many different forms of
technical analysis, from studying patterns on charts, to
using sophisticated computer programs that create automated
trading systems. While technical analysis is often regarded by many as extremely complicated, its basic tenets are rather straightforward.
Let's look at the concepts of "resistance" and "support,"
for example. If a stock has been trading back and forth
between $15 and $20 over the last two months, the stock is
said to have resistance at $20. In other words, over the
past two months, the stock has "resisted" breaking $20 and
has, instead, floated back down to $15. But, it has also
found "support" at $15 and has not dropped below it, instead heading back towards $20.
The technical analyst looks at that stock and says, If the
stock hits $20 again, it can do one of two things - it can
break the resistance at $20 and head higher or turnaround,
go back down and reinforce the resistance.
Let's say the stock does break through and goes to $25 a
share. Then, it starts to drift back down. A technical
analyst will look to purchase the shares at $20 because they believe that the former level of strong resistance will now offer great support for the stock. Resistance once broken, becomes support, and vice versa. All technical analysis, no matter how complicated it gets, comes back to this concept -- the notion of following a stock's historical movements in an attempt to understand how it may behave in the future.
Think technical analysis may be the investment philosophy
that works for you? Heed the words of John Magee: "When you enter the stock market, you are going into a competitive field in which your evaluations and opinions
will be matched against some of the sharpest and toughest
minds in the business. You are in a highly specialized
industry in which study by men whose economic survival
depends upon their best judgment. You will certainly be
exposed to advice, suggestions, offers of help from all
sides. Unless you are able to develop some market philosophy of your own, you will not be able to tell the good from the bad, the sound from the unsound. "
Magee's book, "Technical Analysis of Stock Trends," is a
great resource for those looking to dive in head first.
The entire jungle weekly is here:
stockjungle.com |
