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Technical analysis is a scientific charting method developed by professional investors for the dual purpose of timing the stock market and predicting future price movements. Many individual investors use the historical data found on Internet Websites such as bigcharts.com,decision point.com, and stockmaster.com to keep track of the stocks they own. Charting stocks, or technical analysis, is the basis on which professional and individual investors make sound decisions about portfolio additions and deletions.
Patrick Lyons, a research analyst with NCM Capital Management Group in Durham, North Carolina, says technical analysis helps investors "take the emotion out of investing." Technical analysis differs from fundamental analysis. Fundamental analysis takes into account certain factors, such as annual reports, dividends and earnings. Technical analysis, however, is driven purely by a comprehension of price patterns drawn from price activity on both a short- and long-term basis. Frank Barbera Jr., a member of the Market Technicians Association, the organization which licenses technicians, says, "The price of a stock discounts everything else that is known about a company." Furthermore, he says, "Price patterns can alert investors to pending changes in direction." Barbera is so adamant about the importance of a stock’s price that he says, "I will not call a company for an annual report unless I like the chart."
Most technicians publish monthly newsletters and offer advice to their subscriber base through a weekly hotline service. Computer software has brought a wealth of information to the fingertips of the average investor and if the investor knows what to look for when viewing a chart, they can easily access and use information that previously was only available through a fee-based professional service. The purpose of technical analysis is to protect investors from buying stocks at an overvalued level, or selling at an extremely undervalued level.
Jerry Favors, editor of the Jerry Favors Analysis Newsletter (www.jerryfavors.com) and a frequent commentator on CNBC’s business and financial news beats, admits that technical analysis takes quite some time to learn, but says "certain techniques can be learned to indicate for an investor whether the stock is going higher or lower." If the price of a stock is likely to decrease, it is said to be on a downtrend, while a stock whose pattern shows a likely increase in price is said to be on an uptrend. Favors says further that technicians study both short- and long-term charts in order to identify price patterns and that monthly charts allow investors to see stocks at both high and low price levels. An uptrend indicates to the investor to go long on the stock while a downtrend instructs the investor to short the stock.
Although technicians have created dozens of methods for charting stocks, the modes most used by technicians include the Dow Theory, the McClellan Oscillator and the Elliott Wave. Well-respected analysts such as W.D. Gann, John Murphy and Stan Weinstein have all authored books on technical analysis and their work provides basic instruction in an area that is