The gross domestic product came in at a 5.7% increase last quarter, 0.9 % ahead of predictions. Nevertheless, the market had its worst month in the last ten as traders worried about technical analysis indicators. Technical analysis says that the future direction of stock prices can be predicted solely by studying past market data for price and volume indicators. Technical analysis says that all relevant market data is reflected by prices so that fundamental analysis is unnecessary. Technical analysis data is built into trading programs allowing the day trader to predict pending market moves with a fair degree of accuracy.
A long term investor steeped in fundamental analysis will say that real world events are often picked up so rapidly that there is no time for most investors to do fundamental analysis before the market has moved on. On the other hand the principles of value investing which have made the likes of Warren Buffett famous and rich successfully pick outstanding long term investments that traders seem to have overlooked. The trader will respond that he or she is interested in short term profit and not waiting for years for an investment to show profit.
A fundamental analysis trader will look at stocks that seem to have been left behind as the market rallied year hoping to make money trading catch ups. In thinking what are penny stocks an investor will think in terms of hoping to catch the next Microsoft of Genentech before it takes off. A trader will think that these stocks have too little volume to predict prices.
Studies of the stock market show that on days where there are large market moves timing and nature of news from the press do not correlate with the market direction or volume. Day traders using technical analysis rely upon the fact that investor sentiment and action tends to repeat itself. Analysis solely based on technical factors is a kind of statistical prediction. Statistics does not predict which investor will buy which stock at which price but it does often predict that a certain percentage will buy or sell certain types of stocks.
An example of technical analysis is when the market is very bullish on a stock. That typically means that those with money and interest have bought the stock already. With fewer buyers left over the odds begin to favor a downward movement of the stock with any flicker in the stock price as those who have gains will often take profits. The profit taking causes more profit taking and a substantial correction sets in caused by herd mentality. The day trader steeped in technical analysis can short the stock and ride this correction down to a support zone, making profits along the way.
In looking at the pros and cons of after hours trading the technical analyst will be concerned that there will not be enough volume to make a trading program accurate where as a fundamental investor will hand around looking for a breaking news that will drive the market.
The long and the short of it is that technical indicators are telling traders that despite a nice gain in GDP an upward direction for the market is not assured.
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