Technical Analysis

Analysis Part II

Carrying on from Fundamental Analysis, Technical Analysis is also used by the wise-owl.com team to ensure our recommendations have passed all the key check-list items we have before we recommend any stock.

Technical Analysis
Technical analysis is at its most basic, an analytic, empirical approach used to to determine when and how a shares current market price is likely to change. We do this by studying historical performance of stocks, and looking at statistics such as price and volume, to identify patterns of future performance. Technical analysis is a study of the actual share price movement, not the fundamentals of the company. Put simply, in contrast to the fundamental approach, technical analysis effectively looks at what is happening, not what should be happening.

The movement of a stock is defined by such concepts as barriers, channels, wedges, breaks etc which relate to the patterns of movement of the chart of the stock price.

The editorials of Charles H. Dow (1851-1902), journalist, first editor of the Wall Street Journal and co-founder of Dow Jones and Company, are widely accepted as the foundation of this approach.

The approach was refined after his death by Hamilton, Rhea and Schaefer, and was eventually collectively referred to as Dow Theory, even though Dow himself never used the term. The Dow Jones Industrial Average stock market index too, still bears his name.

In summary, Dow Theory proposes that major market trends are composed of three phases: accumulation phase, public participation phase, and distribution phase.

During the accumulation phase “in the know” investors are actively buying (selling) stock - in contrast to the general market. During this phase, the stock price changes little, because these investors are just a small part of the market. When the market wakes up to these activities, a rapid price change occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, astute investors begin to distribute their holdings to the market (distribution phase).

Since one of the most important aspects of technical analysis is to trade with the trend, and not against it, it becomes imperative that all trends - short, medium and long term - are analysed. An arrow, as shown below, will indicate the direction the Investing team believes the stock is heading in:

trend is up
trend is down
trend is sideways or range trading

One of the main strength’s of Technical Analysis is in identifying when a move in the share price is likely to occur. Each recommendation comes with technical commentary - to demonstrate, here is an actual extract from a wise-owl.com ASX200 Report recommendation; 

“A break out of a large descending wedge pattern saw the stock begin to trade a large bullish channel at the end of 2002. This break pushed the stock from a low of $2.60 in October 2002 to a high of $5.25 in December 2004. Since then, the stock has traded sideways in a flag formation, with a recent break implying an end to this consolidation period. The all time high of $5.50 has recently been broken, with new highs being created. The main risk would be a drop below the first support level at $5.02, which would bring critical support of $4.78 into play.”

In summary, Fundamental Analysis can tell you what to buy, but not necessarily when to buy. Technical Analysis can be used to identify when to buy into a share and when to get out of the share. This is why wise-owl.com uses both forms of analysis to ensure a rigorous appraisal of all stock recommendations meet the criteria before we recommend a stock.