Technical Analysis Comes into Its Own

Financial News, December 2, 2001 | Go to article overview

Technical Analysis Comes into Its Own


Having played third fiddle to fundamental and quantitative analysis for several years, technical analysis has come into its own again as the stock markets have headed south.

In the current volatile market, investors no longer want to rely solely on fundamental or quantitative research, but are looking for a variety of research tools to plot their next move.

Ann Whitby, vice chairperson of the Society of Technical Analysts in the UK, says: "In a bull market, investors did not want technical analysis as much because whatever they bought went up. However, now it's not that easy, and in difficult times people look at a wider range of tools to analyse the markets.

"Technical analysis has also become more popular because there is more emphasis this year than last on stock selection."

Elizabeth Miller, head of research at Redtower Group, an independent research house and consultancy, based in London, concurs.

She says: "In the last phase of the e-boom, there were many technical analysts saying that the market was overbought, but investors did not want to listen because share prices were still rising. At the moment, though, investors are looking at different viewpoints."

Although some continental European and US houses based in Europe do not have a specialist technical analyst, many have people in their New York offices who are responsible for plotting charts for the different world markets.

One analyst says: "In the early days of research, there was not that much information available, so people relied on price data. Brokerage houses that had technical analysts or chartists were seen as having a competitive advantage.

"Today, there is a great deal more data available and the tools of research have also become much more sophisticated. A great deal of technical analysis is being conducted by fundamental analysts, but interest has picked up over the past year as more institutional investors are using it again."

Technical analysis, which is considered the oldest form of security research, can trace its roots back to the turn of the last century when Charles Dow looked at the price behaviour of two of the Dow Jones averages - the industrial and the transportation averages.

Today, it incorporates mathematical equations, chart patterns and the manipulation of historical data to show where stock prices are headed.

Bruce Kamich, an adjunct professor of finance at Rutgers University in the US, says that the logic behind technical analysis is based on underlying assumptions that markets are leading indicators and that their action or prices discount the future.

It also assumes that history tends to repeat itself and prices move in trends. …

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