Q: Rick, let’s discuss the basics of technical analysis. In a nutshell, what does the term technical analysis mean?
A: When investing in securities, technical analysis means using market statistics, market history and chart patterns in an attempt to establish the best time to purchase a given stock (or any other type of security). Many different types of charts can identify specific patterns which may reveal preferential timing of the buy/sell decision. Technical analysis is based on three main assumptions:
- The market discounts everything
- Price movement follows trends
- History repeat itself
We have all heard sayings like, “sell in May and go away,” “the trend is your friend” or, “the stock is trading at its support level.” These are all examples of technical and historic indicators.
Q: How does technical analysis differ from fundamental analysis?
A: Where fundamental analysis judges the merit and valuation of a specific company, technical analysis is not concerned with a stock’s valuation, but instead focuses on past trading patterns and what information that data may provide about future price movements. To take this idea a little deeper, below is a list of some of the specific differences between fundamental and technical analysis.
Fundamental Analysis Focus vs. Technical Analysis Focus:
- What to buy vs. When to buy
- Company management vs. Trend analysis
- Earnings quality vs. Relative strength
- P/E ratios vs. Momentum
- Quality of products or services vs. Historical trading analysis
- Competitive advantages vs. When to sell
Q: What are some of the key technical indicators to consider when looking at the overall market or a specific security?
A: At Ancora, we consider ourselves to be students of the market in all its forms. Therefore, we like to look at a variety of historical facts and trends in addition to strong fundamental analysis. More specifically, we review trends which show “over bought” or “over sold” conditions in individual securities or the overall market. We also will look at how stocks trade relative to a long-term trend chart and take note when a stock begins to have higher trading volumes.
We use technical analysis to determine what we consider to be the best time to buy a company that is trading at or near a 52-week low. Consequently, we can identify potential bargains by shopping in “unloved” sectors. While fundamental analysis of quality and corporate competitive advantages remain our best way to evaluate the long-term potential of an investment, technical analysis can be a valuable and complementary tool to potentially better understand more favorable times to buy or sell.