Using technical analysis to predict future
June 18, 2013
Stocks not only rise and fall on investor sentiment but also on what analysts call technical indicators.
Not based whatsoever on company fundamentals, sales or profits, technical analysis solely relies on a stocks movement in relation to its price history.
Simply put, technical analysis tries to predict future stock movements by what the stock price has previously done and there are many methodologies that go by many names.
Chart analysis looks at a stock price charted on a graph, and the particular shapes of the resulting curves can give an indication of what will be the future price action.
Chart analysis is the simplest of technical indicators and "chartists" believe these graph shapes can tell a lot about what will be the next move.
Accumulation and distribution analysis dissects the number large and small blocks of stock sales. When larger blocks are sold or bought it may indicate where the so called "smart money" is going. Many smaller blocks of a stock traded usually indicate what the "dumb money" is doing and typically that means Mom and Pop investors. It is thought when the smart money sells large blocks, stock is being bought by many smaller investors in smaller blocks, and that may mean the stock is about to sell off.
Moving averages can also be an indicator of future movements. Stock prices are charted once again, but this time, instead of looking at the shape of the chart, the price of a stock is plotted against the stock price averaged out over a specific period of time. Typical averages are the 50-day moving average or 200-day moving average. When daily price is plotted against one these averages, any point where they cross could be a significant signal that the stock is about to run or fall.
There are many other technical methods using smaller time frames waves and curves that may span days or years to theories based on price movements spanning decades.
The same technical analysis may be used on commodity prices, large sector funds or even the markets in general such as the Nasdaq or Dow Jones Industrial averages.
Each particular theorist of course swears by his method, and only in hindsight does an analyst find out if his method was successful.
The caveat surrounding technical analysis is, like many other methods used to analyze stocks to try and guess their movements, they don't always work.
Unforeseen economic or political events can toss any analysis out the proverbial window, and even without such events, markets always seem to have a mind of their own regardless of how well we think we can predict them.
This article expresses the opinions of Marc Cuniberti. He hosts "Money Matters" on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. His website is http://www.moneymanagementradio.com
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