Category Archives: Basics

Some myths of Inter-market Analysis and Technical Analysis

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.

 

 

Technical Analysis and Fundamental Analysis

Another step towards basics of Technical analysis is to understand how it is related to Fundamental Analysis and what does market prices represent. So lets look down at few points.

  • Technical Analysis considers only past price action to forecast future prices price, while Fundamental Analysis takes into consideration Economic factors of demand and supply that causes price to move higher or lower.
  • Fundamental Analysis represents the cause of the current market price of the stock while Technical Analysis studies the effect of such cause.
  • Market prices leads to known Fundamentals which means on crucial market reversal Technical Analysis leads the change as its based on market prices.
  • Market prices have already discounted known Fundamentals which means it moves in anticipation of unknown fundamentals by which Technical take a call through price patterns.

So this was to explain you guys that how are both school of thoughts related and both are important for research of and stock as it compliments one another always. In next post we shall continue further with the Technical Analysis tenant.

Lets Start with Technical Analysis

A common definition of Technical Analysis as said by John Murphy: “It is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”.

Technical analysis is basically study of historical prices where underlying asset has traded in past. Study gives more emphasis on the closing price after which Open, High and low are the considered for analysis. As a Support to price for analysis even  Volume and Open interest (For derivative markets) is considered to arrive at a conclusion on our technical research.

Three Rationales which analyst considers while  he carries his technical research are:

  • Market price, or stock price, discounts each and every event whether fundamental, political, psychological, political or any otherwise. It refers that prices are arrived with the difference in Demand and Supply of any factor mentioned Above.
  • Price moves in trend is the second rational which a analyst believes while looking at prices charts. Trend can be either Up, Down or Sideways but stock has to be in either of the trend.
  • History repeats itself:  Though not in the exact sense or prices but it should be in similar patterns or similar type of trend characteristics.

So to start off with what is technical analysis this could be the thumb post for you all. If you have any queries feel free to reply this post and you shall get reply asap. In next post we will try to differentiate between Fundamental Analysis and Technical Analysis.