By John Drachman
On Tuesday, CNBC announced, “GE posts best month ever, but market analyst says the chart looks ‘questionable.’” Meanwhile, their top analyst Jim Cramer noted elsewhere, “If Facebook, Apple, Amazon and Netflix can stay on the market’s good side; then the charts suggest they have a lot more room to run.”
So what are these “charts” exactly and what do they have to do with anything?
A technical analyst’s charts are like a plumber’s tool box. They’re what investors and traders employ to identify investment opportunities by looking first at statistical trends, such as movements in a stock’s price or trading volume.
Technical analysts like Jim Cramer don’t generally try to gauge the underlying value of a security. Here’s why: Technical analysts – or “elves” as they were once referred to on PBS’ Wall Street Week – believe value is already baked into a stock’s price. The true North of a company’s future price instead must be found by using stock charts that identify patterns and trends that indicate what a stock will do in the future.
Preferred technical analysis indicators include:
- Simple moving averages (SMA) help evaluate a stock’s trend by averaging the daily price over a fixed time period. The decision to “buy” or “sell” is triggered when a shorter duration moving average crosses a longer duration one.
- Support and resistance utilize price history to contrast where buyers have stepped in to support the stock with the point sellers impeded price advance. Practitioners of this technical art want to buy at “support” and sell at “resistance.”
- Trend lines identify projected buy and sell points based on how the stock has traded in the past. They are particularly favored for new stocks moving to new highs or new lows.
- Momentum indicators come in many colors and each uses its unique formula for deriving trading signals based on a variety of factors. This technique is particularly favored during range-bound or so-called “trendless” market.
Like yin is to yang and night is to day; technical analysis is to fundamental analysis. With the latter, the focus is on evaluating stocks by taking a deep look at economic conditions and industry health as well as the financial strength and management of individual companies. Company earnings, expenses, assets and liabilities are bread and butter to fundamental analysts the way charts and trendlines are to technical analysts.
The Bottom Line
While these two major schools of thought have their purists and advocates, most investors and traders use both to research and forecast future stock prices. For average investors who take the time to learn the basics of technical analysis; the experience of tracking colorful charts while listening to a breathless newscaster can be exciting and diverting – especially during a pandemic. It can be rewarding too; especially if you take the time to review your analysis and you investment idea with a financial advisor who can test your assumption against their own knowledge and experience.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.