Q: I hear people on TV talking about the market’s technical levels. What exactly are they talking about when they are discussing technical levels?
A: Technical levels refer to various indicators of market sentiment. Investors that follow technical analysis tend to follow trading patterns by analyzing price and volume of trading information. This analysis is usually done with charts and other analytical tools.
The reasoning behind technical analysis is that prices of stocks, bonds, commodities and precious metals tend to follow a pattern or trend.
Pricing is determined by the supply and demand. By analyzing trends one might determine appropriate buying or selling opportunities.
data vs. fundamentals
There are a large number of indicators that one might follow in doing technical analysis. Two of the most common and basic indicators are moving averages and relative strength.
There are many good books and Internet resources that can explain the various indicators and how to implement strategies with these indicators. Just remember that when you are employing technical analysis you are relying on data from the market itself. This data may or may not be a reflection of the overall health of the market or a particular investment.
The other type of analysis that you probably hear more about is fundamental analysis. Fundamental analysis attempts to determine the financial health and future prospects for a particular investment. This type of analysis would involve the review of financial statements, economic prospects, industry prospects, management teams, etc. Values are largely determined by the future prospects of the investment.
Earnings, dividends and cash flows are discounted to arrive at a value that is placed on the investment. Common measurements of fundamental analysis that you might hear are; price-to-earnings ratios, return on equity, debt-equity ratios and growth rates. These are just measurements that help to determine financial health and future prospects.
which is right?
There is no right or wrong answer as to which analysis to use. I think that the more analysis and facts that you can have in your arsenal will lead to more informed decisions.
Some people rely strictly on fundamental type analysis while others only look at technical indicators. I think that long-term investors might want to consider a combination of the two.
A careful review of the fundamental factors combined with buy/sell decisions through technical analysis might be a good working plan.
Analysis of various investments can be very intensive and time consuming. If you have the time, expertise and resources you might find this analysis to be enjoyable and productive.
If not, you might want to consider following the work of respected fundamental and/or technical analysts with whom you feel comfortable.
Many people feel that markets are efficient and that the time and expense of active management are not justified. In these cases, passive type investments might make since.
You should determine what you feel most comfortable with and discuss your strategies with your investment or financial professional. In any case it is important to educate yourself and be familiar with the strategies that you or your financial professional are employing.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Greg Epps is a registered representative and Certified Financial Planner with Epps Financial Partners. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.