Investments: Analysis and Management, 12th Edition

chapter 16

Technical Analysis

As you complete your study of how to select and analyze common stocks, you decide you should take a look at technical analysis, because some of your friends have mentioned it, and you have read about charting in the popular press. Technical analysis sounds intriguing—study the price patterns of stocks across time and use these patterns to predict future price changes. After all, when you look at a chart of stock prices some patterns seem to clearly stand out. Alternatively, you could use some so-called technical indicators to aid you in your buy/sell decisions. However, having considered the Efficient Market Hypothesis, you suspect it might not be as easy and rewarding as it sounds. After all, if it easy to do, and it works, would not many investors be using it successfully on a regular basis?

Chapter 16 outlines technical analysis, an alternative to fundamental security analysis. This approach is very different from fundamental analysis and is directly affected by the Efficient Market Hypothesis discussed in Chapter 12.

AFTER READING THIS CHAPTER YOU WILL BE ABLE TO:

• Understand how technical analysis differs from fundamental analysis.
• Critically evaluate most of the techniques used in technical analysis as well as the claims made for these techniques.
• Decide what role, if any, technical analysis might play in your own investing program.

Introduction

Traditionally, stocks have been selected using two major approaches:

• Fundamental analysis
• Technical ...