I am down in Houston at an energy conference as I write this. I just returned from touring a Liquid Natural Gas terminal. Amazing, I'll write about it another time. I am going to take my material today from an article written by D. R. Barton in The Oxford Club Mid-Month Communique Volume 19, No. 3 published February 15, 2006.
Mr. Barton has an explanation of Fundamental, Technical and Sentiment analysis that I liked and want to share with you. I quote,
"Well, Fundamental Analysis - in terms of stocks, in particular - is built around determining the present value of a company by predicting its future cash flow. Fundamental analysts use financial statements for historical data and factor in internal influences like new-product development, management make-up and market competitiveness to determine an estimate of how the company will perform in the future.
The fundamental analysis of the futures and currency markets are similar, while focusing more on supply and demand and external factors such as weather and governmental policies.
Technical Analysis is largely the study of price movement over time. Technical analysis assumes that all known information is included in the price of the stock. Chart patterns and indicators form the cornerstone of this branch of analysis.
Sentiment Analysis, in simple term, measures the amount of optimism or pessimism in a given market. It is a contrarian form of analysis - based on the belief that when too many people move to one side of the market, a change is about to occur.
Sentiment indicators encompass a wide range of tools. There are highly quantitative (computer-based, statistical) indicators like put/call ratios. And there are qualitative measures such as surveys of individual investors or analysts.
All try to gauge the emotion of the market and take advantage of that when it swings too far to one side or the other."
I hope these definitions prove useful. 'More tomorrow.
A Simple Mechanical Swing Trend Trade:
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For those of you with programmable trading software, try this:
* BUY if yesterday's low was the lowest low of the past 10 days, including today.
* SELL if yesterday's high was the highest high of the past 10 days, including today.
Even though this "Mechanical Swing" method will effectively catch the turns for you, it paradoxically has very little value to the true technician. Why? Because it is the DURATION of the ensuing trend which determines a trade's real value, not just where the trend began.
Technical analysis suggests a basis (i.e., a way) to isolate the turns which proceed significant trends, which I would be happy to discuss in detail with any of you, if you express further interest.
Otherwise, I will be prepared to elaborate on some additional technical analysis principles in my future comments, together with sharing some of my research notes on a promising trend-following trading approach (system), which I have been working on developing (on and off) for over the last twelve years!
Posted by: Bob Hansell | February 28, 2006 6:01 PM | Permalink to Comment