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Market Analysis For Serious Traders And Investors

By: Winston Duke

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Market Analysis employs diverse tools and models to offer investors and traders the best edge. The 2 main tools adopted are Technical and Fundamental Analysis.
The recent market behavior of the last decade offer a good look at the virtues of Technical VS Fundamental Analysis.
The Dow Jones Industrial Average started the decade of year 2000 at 10, 937.74, saw a high of 14,198.10, crashed to a low of 6,469.95 on March 2, 2009, partially recovered from its low and ended the last decade at 10,572.02.
Similarly, the S&P 500 Index started the decade at 1,394.46 saw a high of 1,576.09 and ended the decade at 1,136.52.
The NASDAQ Composite Index fared not better. It started the decade at 3,961.07, saw a high of 4,696.69 and ended the decade at 2,308.71.
What a ride! Lots of individuals who panicked and got out at the bottom suffered huge losses.
They also lost twofold since inflation didn't go by the pattern of the Dow; it increased.
Those whose investment approach was based on Fundamental Analysis were hurt miserably. Investors who were buying and holding securities over that period saw their portfolios decline.
Even worse were people who panicked and got out when the market bottomed in early 2009 thereby experiencing and turning huge paper losses into tangible loses before the market recovered partially from the bottom.
The rebound off the bottom is actually astonishing - more than 60% in many cases as of this writing.
Was there a way to sidestep this market meltdown, especially in the final years of the decade? Of course there was!
Proponents of Technical Analysis ride the Trend whether the Trend is rising or down and get in or get out at Support or Resistance.
Technicians following the trend would even have made money going down and on the way back up.
It will be worthwhile to point out a number of the main differences between Fundamental Analysis and Technical Analysis.
Fundamental Analysis focuses on
1. Macro Economic Factors
  • Supply and Demand
  • Other Market Data


2. Company Specific data like
  • Valuations including Ratios of Price/Earnings(P/E), Price/Sales, Price/Book, PEG Ratio
  • Profitability: Gross Profit Margin, Operating Margin, Net Profit Margin
  • Growth Rates: EPS and Revenue
  • Financial Strength: Total Debt/Total Capital, Quick Ratio
  • Effectiveness: Return on Equity, Return On Assets, Return On Investment


Technical Analysis
  • Price action
  • Chart patterns
  • Volume and open interest
  • Human Psychology


Fundamental Analysis is very important and it predicts the long run direction of the stock. However, it has a serious flaw. It usually works with a lag. Additionally it is tricky, even impossible perhaps, to tell when it will be driven by it's fundamentals.
The eminent Economist John Maynard Keynes put it best when he said that markets can remain irrational far longer than people can stay solvent.
Technical Analysis on the other hand provides an instantaneous hint as to the stock's direction which is signaled by the behavior of the stock price.
Technicians also believe that all the fundamentals of the stock are baked into the price anyhow and just studying the price pattern will also justify the fundamentals.
Although there may be some credence to that, what is even more important is the fact that Technical Analysis has so many followers and users all of whom are observing the identical Trends, Support and Resistance and they act the same way based on the same observations.
The rationale that makes Trends, Support and Resistance particularly important to technicians shouldn't be a mystery. They are self fulfilling especially Support and Resistance Levels especially when they take place at nice round numbers.
This is because numerous traders do the exact same things at the same time resulting in a herd mentality thus confirming these Support and Resistance Levels. So if you can identify these points, you can profit immensely.
Hence the explanations for big bounces off Support and Resistance. To get a step ahead many professionals attempt to preempt some of these events.

Article Source: http://depositarticles.com/

To learn more about Analysis of stocks , GO TO stock-trading-guru.com/technical-analysis.html for more detailed information. Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990's and has since become very active in the Stock Market. Winston Duke is the creator and author of several web sites including Tobagosite.com / Though his interests are many and varied, and he has indulged himself in a multiplicity of sectors, his true and enduring love is in dealing in the Financial Markets.

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