What is technical Analysis?
Technical analysis is a method for picking out the best investment opportunities. This is done not by looking at predicted earnings. Nor do balance sheets and book values give you any idea about how much a stock will appreciate in value.
Before a stock begins its move certain forces come into play that contribute to the potential stock movement. One such force is stock accumulation. Stocks have cycles just like the stock market. After a period of extended decline a stock will run into a phase called capitulation, where you just throw in the towel and sell. Most of the weak holders of the stock have been purged.
A stock will then enter into a period of preparation before it moves, this is called a period of accumulation. The stock will trade in a certain price range, for Apple in the above chart it was between 7.5 and 12. When the stock is in this price range movements to the upside are accompanied by increasing volume while movements to the downside are on decreasing volume. This period of accumulation could last anywhere between three months to a year or two. The accumulation phase for Apple Computer lasted about 2 years, once it began the markup stage above 12.5 there was no looking back (see above chart).
Investors began accumulating Apple shares over two years between 7.5 and 12. They were unlikely to sell once the stock began to make its move up since they have been accumulating the stock for such a move. The stock is now in stronger hands, people less willing to look for another investment. So, when people looked to buy the stock the demand was not met by much supply and the stock price goes up! There will always be sellers but in this instance there are fewer sellers than buyers.
In Jeremy Du Plessis’s book “The Definitive Guide to Point and Figure” he describes technical analysis. “The important point to remember is that it’s people that create the price; their fear and greed, their hopes and prayers, and their opinions. The price, and therefore the chart, is the weighted average sum of everyone’s opinion about a particular share, future or commodity. It’s better than an opinion poll, because everyone with the slightest interest in the share makes their mark by participating in the buying or selling thus making the price go up or down. A chart, therefore, is a study in human behavior, and that is the key to technical analysis.”
I will be introducing you to some tools that will help you manage your investments and give you a better chance at being right.