Technical Analysis INTRO: The way most people analyze stocks centers around such fundamental factors as the company’s balance sheet and growth of earnings. There is, however, another method of stock analysis, which totally ignores such fundamentals. Bruce Hagan, certified financial planner with RAI Investments and Corporate Securities Group is here to explain. Q1. Bruce, how can one possibly analyze a stock without knowing if the company is even making money? A1. Seems strange doesn’t it? Fundamental analysis is certainly the more widely used method and we’ve discussed that on this show, but there is another school of thought, which focuses on the study of changes in stock price. Technical analysis attempts to predict future price changes strictly on the basis of past price changes. Technical analysts contend that it is not necessary to study economic fundamentals to know where the price of a security is going because past price movements will indicate future price movements. Q2. I’ve got to tell you this sounds a little bit like "voo-doo" or magic to me. How can this work? A2. Well there’s always ongoing debate about whether in fact it does work; but there is some logic behind this method. A technical analyst will tell you that someone touting the merits of a stock is talking with his mouth, but a chart of stock’s past price movements is a factual record of people talking with their pocketbook. A chart may form patterns that indicate at what price a majority of people tend to buy a stock and at what price they tend to sell. So it can offer some valuable information. Q3. It is beginning to make more sense. Tell me, what are some of the basic assumptions of technical analysis? A3. There are several. Market value is determined solely by the interaction of supply and demand for stocks. Supply and demand are governed by numerous factors, both rational and irrational. Stock prices tend to move in trends which persist for long periods of time and Changes in trends are caused by shifts in supply and demand relationships. These shifts, no matter why they occur, can be detected sooner or later in the action of the market itself. Q4. Okay, so do these assumptions then lead to recognizable patterns that can be interpreted? A4. Yes, and we call these technical indicators. Some of these are widely used and the terms are no doubt familiar to some of your audience. They include moving averages, the advance-decline line, the Dow theory, relative strength, short interest ration, and others. Q5. Can you give us an example of how this "reading a chart" could be useful? A5. Let’s say a stock has tended to move between $10 and $20 for a long time. Every time it gets down to $10 there seems to be support for the stock at that level and every time it gets near $20 there seems to be resistance. If the stock were to finally break through this long-term resistance area and trade above $20, that might be interpreted as a breakout and would be a positive indicator. Now if that occurred along with some good fundamental news such as the company’s apparent successful rollout of a new product you would have both a fundamental and technical reason to consider it a buy. Be aware, that even then there’s no guarantee that you’ll be right. The discussion offered above and in the movie should not be considered an endorsement by Florida State University. They are offered in the educational sense of providing thought-provoking information for our Web audience. Copyright shared with Florida News Channel (FNC), all rights reserved. Broadcast 3/3/00