You Have to Follow The Money - What Is The Price?

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Chartists map the action of the investment in which they are most interested.  This could be a particular stock, an entire market, a commodity or anything else with a readily available market price.  Al Frank was a self avowed value investor.  However, he admitted that he did pay attention to some technical analysis to improve the timing of his value investing.  He discussed some of the technical investing tools which he used in his career in his book, Al Frank's New Prudent Speculator.  To him, the following summarized technical analysis:

When an equity issue - a common stock, preferred stock, or master limited partnership - trades, only one of three things can happen with its market price.  At that day's close each issue can have advanced, declined, or remained unchanged in price compared to its previous close (not necessarily the previous day)...Advancing-in-price issues represent buying - or at least more buying than selling at the moment - on the basic notion that an excess of buyers over sellers (or greater demand than supply) tends to bid up prices.  Conversely, selling is represented by stocks declining in price.  On any given day the fluctuations represented by buyers and sellers often appear to be random, as orders pour in from all over the world, some to trade "at the market" (the current asking price) or at a price limit with the trader hoping to to get a better deal than the current bid or ask price of a sale or a purchase.

Notice the gentle jab Frank takes at Random Walk proponents.

There is a book which is considered by many to be the bible of technical analysis; much like The Intelligent Investor by Benjamin Graham is widely seen as the bible of fundamental analysis.  Technical Analysis of Stock Trends was coauthored in 1948 by Robert D. Edwards and John Magee.  Its 8th and 9th editions, both edited by WHC Bassetti, are still in print today.  Some consider the following excerpt from the book to be the all time best description of technical analysis:

The market price reflects not only the differing fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, but it also reflects their needs and resources - in total, factors which defy analysis and for which no statistics are obtainable.  These are nevertheless all synthesized, weighted and finally expressed in the one precise figure at which a buyer and seller get together and make a deal.  The resulting price is the only figure that counts.*

If you look back at the advice of the value investors, you will see that, for the most part, they recommend investing for the long term.  It seems to me that, given the daily movement of the market, technical analysis looks at a shorter time horizon.  It appears to be more of a tool for speculation, looking for a profit within days, weeks or months - not an appreciating investment over several years.  We will continue to explore this strategy in further detail in upcoming blogs.

The material from Al Frank's New Prudent Speculator by Al Frank, copyright 1995 by Al Frank, is used with permission of the copyright holders, the heirs of Al Frank.

*Excerpt from Technical Analysis of Stock Trends, by Robert D. Edwards & John Magee, copyright 1948 by Robert D. Edwards & John Magee, page 5.

Comments are always welcome.