It is believed that Technical Analysis can only predict equity markets for short term only but this is just a myth. Following are few points to correct your myth on this school of studies:
- Any Asset Class: Technical tools can be applied to any asset’s price forecasting which is not possible for Fundamental. For example, if you have price history of say, Vegetables, then we just need to work plot its chart and you can forecast future prices. So today, if you are sitting in India but have chart plotting of US markets, then you can surely predict them as good as some analyst in US.
- Any time Frame: Technical analysis can be applied on any time frame of charts ranging from tick charts to even yearly charts while Fundamental can only be applied two longer time frame as Fundamentals doesnt change much in Shorter time frame.
- Economic Forecasting: Technical analyst could predict some economic change earlier than fundamentals such as say rising commodity prices would suggest inflating economy which means economy would grow and interest rates would go down which is vice versa when commodity prices are expected to go down.
So now clarify with simple example myth of Inter-market analysis and technical analysis through a common example…Check out the attached Graph which is the monthly chart for comparison between three asset class of Indian economy WTI Crude (Blue line), Equity Nifty index (Yellow line) and IIP (Pink line).
Now let me clarify myths :
- It is believed that lower crude prices are good for economy and markets: As you all could notice that i have circled tops and lows of each index in comparison and we could conclude easily that on broader time frame, Equity, crude and Economy moves in the same direction. Rising crude prices have seen rising Equity markets and Rising IIP while vice versa is also visible.
- Most importantly it is believed that Technical analysis can only be applied to smaller time frames and it can only simply predict prices. So now let me tell you that this time frame is monthly time frame and if you could pick up the low or high on monthly chart than you can surely take decision for your portfolio. Interestingly, you can notice that Nifty has signaled reversals on top and bottom before crude or IIP has shown. So this is surely saying that Technical can Forecast economy prior to Fundamentals through study of various asset class charts. All the three cases circled, you can notice that Nifty (yellow line) has topped and bottomed before Crude or IIP has done
So hope i am able to clarify some myths on Technical analysis and inter-market relations. Its purely just my view and you may differ with my idea.