Instinctively our minds are wired to detect patterns. Any person looking at a typical stock price chart will feel that he/she can predict where it will go based on where it has been.

How strong is the pattern recognition of humans? Consider the following demonstration (don't worry, you'll be able to read it):

The hmaun mnid's aliitby to rcigenzoe ptrtanes is azimnag. Wrdos slpeled wtih the letrets all mxeid up can sitll be raed vrey esaliy as lnog as the frsit and lsat ltertes are in the rgiht palce.

There are two basic approaches to investment research - fundamental and technical analysis.

Fundamental analysis involves actually sitting down and reading through the company annual reports and researching the industry as a whole.

Pure market technicians learn all they need to know from looking at the charts. Technical analysts have devised an entire mythology surrounding the future price projections by simply looking at a chart. They may only know the company by its ticker and have no idea what the company does. What's more they may boast that they do not even care.

Using little more than a ruler a technical analyst can draw various trend lines - primary, secondary, tertiary and can apparently tell you where the long-term price will go, but that any short-term predictions will be difficult to determine. Really? You don't say...

Elliot wave analysis uses a recurrent wave structure and has a various set of rules and counter-rules to explain how it supposedly works.

Then there are the head-and-shoulders formations, the pan-handle, and so on...ad nauseum. Then for each of these, there seems to be an exception.

Should it not matter that the company issued enough stock to double the number of shares outstanding? What about payments on debt? Is revenue increasing or declining? How profitable was the last quarter? Are there recent labour, political, and/or environmental concerns? These questions should be of great concern to somebody purchasing shares in a company.

How exactly by looking only at a chart of historical prices and nothing else, can a prediction about the future be made? To me, this makes about as much sense as driving a car by looking out the rear window.

Why does technical analysis predominate? Is it just sexier? Maybe it's just a lot easier than reading through company reports.

Published on http://DollarDaze.org - May 30, 2006.

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© 2006 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.

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Posted in General Stock Analysis, Mike Hewitt