Monday, July 25, 2011

Technical and fundamental analysis

The common thread between technical and fundamental analysis is the study of trends.  Where technical analysis is the study of trends in price and volume, fundamental analysis concerns itself with economic and corporate growth trends and the projection of performance based on trends of relevant factors.

The basis of all long term trends in price and volume for any tradable is fundamentals.  Technical analysis thrives on the study of changing supply and demand patterns.  In the study of trends it is important to determine significance in changes in underlying perceptions of value that result from fundamentals and the forecasts of future performance.  A balanced understanding of the two disciplines can provide an excellent basis for a successful trading experience.

As with technical analysis, there are many fundamental tools that are purposed toward early identification of trend reversals.  A corporate growth rate forecast might be revised as a result of an earnings warning, or perhaps as a result of a sudden or continued decline in industry sales reports, or by association of sector move.  Forecasts that are a continuation of the most recent trend and do not range very far into the future can be measured against longer term forecasts as a ratio that may give a fundamental analyst a stronger knowledge of the conditions of market valuation. 

An expanding triangle usually cannot sustain the pattern.  Penetration is often to the down side. A drop in P/E might mean lower price and constant earnings, or constant price and lower earnings or some variation of the two. If the pattern held, a rising P/E could peak in 5 or 6 years. This usually means price has increased more than earnings. In a positive growth environment that could speak highly of price in the next 5 or 6 years.  But it also could mean that price holds steady while earnings continue to decline.  The key to the interpretation of this approach is to have a strong sense of earnings.  There are many combinations of technical tools and fundamental analysis.