Technical Analysis

The potential rewards of market timing were significant when market made no headway at all for those investors willing to learn the art of market timing through a study of technical analysis.

To investors willing to buy and hold common stocks for the long term, the stocks market has offered excellent rewards over the years in terms of both dividend growth and capital appreciation. The market is even more challenging, fulfilling, and rewarding to resourceful investors willing to learn the art of market timing through a study of technical analysis.

The advantages of this approach over the buy-and-hold approach were particularly when market made no headway at all. Yet there were some substantial price fluctuations. The potential rewards of market timing were therefore significant.

In practice, of course, it is impossible to buy and sell consistently at exact turning points, but the enormous potential of this approach still leaves plenty of room for error, even when commission costs and taxes are included in the calculation. The rewards for identifying major market junctures and taking the appropriate action can be substantial.

Why Technical Analysis?

When holding periods are lengthy, it is possible to indulge in the luxury of fundamental analysis, but when time is short, timing is everything. In such an environment, technical analysis really comes into its own.

Originally, technical analysis was applied principally in the equity market, but its popularity has gradually expanded to embrace commodities, debt instruments, currencies, and other international markets.

In the days of the old market, participants had a fairly long time horizon, stretching over months or years. There have always been short-term traders and scalpers, but the technological revolution in communications has shortened the time horizon of just about everyone involved in markets.

To be successful, the technical approach involves taking a position contrary to the expectations of the crowd. This requires the patience, objectiv­ity, and discipline to acquire a financial asset at a time of depression and gloom, and liquidate it in an environment of euphoria and excessive opti­mism. The level of pessimism or optimism will depend on the turning point. Short-term peaks and troughs are associated with more moderate extremes in sentiment than longer-term ones. The aim of this book is to explain the technical characteristics to be expected at all of these market turning points, particularly major ones, and to help to assess them objectively.