Technical Analysis - a misunderstood topic by fundamental analysts

Technical Analysis is a much less understood subject by fundamental analysts. It is considered more of voodoo than being an art based on science of patterns and trends. Lets try and dispell some of the myths so technical analysis is treated more of a friend by most of the fundamental analyst community.

Technical analysis gives you a view to how other market participants have reacted to the stock in the past. This is an important data to understand and interpret as humans tend to react the same way in times of greed and fear and hence likely to repeat such behavior. In essence, a technical analyst believes that patterns repeat themselves and hence tries to find patterns in the stocks previous prices and volume charts and extrapolate the same in hte future. The basic tenet behind technical analysis is that human behavior is repeated whether it be greed or fear. Hence the knowledge of market behavior participants in the past gives you another data point to consider ascertaining the stocks future performance. Technical analyst is based on human behavior be it greed or fear and people tend to react in the same manner no matter what security or what time frame and hence the concept of symmetries and patterns.

There is a saying in the Indian market “bhaw bhagwan hain” meaning price is god. Prices by themselves convey a lot as is taught to us in basic economics. Technical analysts take it to the next level by looking at open, close, high and lows of a security in one day, one week or one month. By looking at patterns they can tell whether bears or bulls rule the market.
As is with fundamental analysis, it is more of an art than an exact science. For a fundamental analyst a P/E of 10 can mean overvalued as well as undervalued depending on where the market, the sector and the company has traded historically and his future expectations. Similarly for a technical analyst it is the subtle art of deciphering patterns and symmetries can make all the difference whether a particular stock is overvalued or undervalued.

The basic advantage that a fundamental analyst gets is to get a sense of the entry and exit levels of the stock.

A word of caution - Technical analysis does not work on illiquid stocks as in such stocks it is not the behavior of the masses but that of a select few that have more often than not insider information. Hence, technical analyst is most useful on liquid stocks.