Back to the Basics: The Fundamentals of Technical Analysis
To start the new year, I was asked to go back to the basics, so in this month’s column I’ll describe the broad purposes of technical analysis and review the fundamentals of the most important indicator.
Technical analysis is the study of the action of the stock market, and generally it was created when Charles H. Dow, editor of The Wall Street Journal and co-founder of Dow Jones & Co., devised the first stock market averages to reflect the state of the stock market. Dow described the workings of the market through a series of editorials in The Wall Street Journal. These theories were further developed by William Peter Hamilton in his Barron’s editorials and book (“The Stock Market Barometer,” 1926), Robert Rhea (“The Dow Theory,” 1932), and H.M. Gartley (“Profits in the Stock Market,” 1935). In the latter book can be found many of the topics that are important today.
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There have been countless other books written on technical analysis and many “niches” have developed over the years—oscillators have become very popular, and momentum, relative strength, stochastics, and moving averages have all found their moments of fame.
But for the individual investor, the key question remains, “What’s the big picture?” While it may be entertaining to follow the day-by-day to week-by-week action of the market, knowing whether the market is a bull market or a bear market remains the most important decision. Despite the wide variety of technical indicators available to provide different insights into the market, the overall trend is still the bottom line.
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