Charting the stock markets: does technical analysis work?

How does one know if a market is technically strong?

What does it take for a market to be considered technically strong? And when we say market, we refer to the whole stock market or just a market segment. It is considered technically strong if it has strong numbers or positive data points for various indicators. Market analysts and stock analyst regularly checks and tracks these indicators. To name some examples, we have A/D or advance/ decline, TRIN or the Arms Index, and moving averages. On the other hand, a weak market has key indicators that suggest potential losers and winners. Let us get to know more about the indicators:

  • The advance/decline line or A/D. It tells us the number of stocks that close at a higher price with the number that closes at a lesser price over a few days or weeks.
  • The Arms Index or TRIN. It is a comparison of the quantity of stocks that are increasing and declining in price at the close. It comes with the volume increase and decreases on a similar day. Looking at this, in the long run, can be an oversold or overbought market indicator. Hence, they are about to increase or have a correction soon.
  • The moving average. It determines the stock share’s average price in the long run. It smoothens constant price stock fluctuations. So, it specifies a number that will most likely increase or decrease in the short-term future. 

The market analyses

Three market analyses can help traders in developing better ideas and decisions. We have technical analysis, fundamental analysis, and sentiment. We say this because one of them plays a significant role in today’s topic. Technical analysis is without considerations for the actual quality of a stock or the company behind the stock. There are technical indicators that can signal a strong or weak market. However, this signal may only provide a short-term view. Long-term views are more helpful if you want to understand a company’s or an industry’s fundamentals. But here is the thing, long-term views may also be hard to predict. The price will increase if stock buyers outnumber sellers. On the other hand, the price will decline if sellers outnumber buyers. This is what the law of supply and demand tells us. It is crucial information about the market, and every trader needs to know this.

Aside from technical analysis, many people support fundamental analysis. Unlike technical analysis that focuses more on charts and graphs, fundamental analysis focus on a company’s finances, management, past performance, and more. They do this to know if the current stock is more or less depending on all the information we enumerated earlier and how others value it by buying and selling the shares.

Some people are pro-technical analysis, and there are pro-fundamentals. Some look at both. Both of them are helpful. However, they can never tell the high and low of an asset. So, it is essential to go through a rigorous analysis to know whether the asset’s current price is overbought or oversold.

Going back to the technically strong markets

Individual stocks. Industry sector. The whole market. These are the entities that technical analysts look at when they try to get profits. They think that pricing trends that already happened in the past tend to repeat themselves. So, they use price charts to track trends in the long run. The goal is to know the best time to buy and sell to make profits. A technically strong market for a security, a basket of it, or a broad index, will make analysts buy because they expect the prices to rise.

Ending our topic with more indicators

If you want to know more about predicting the market movements aside from these, there are more options for you. Analysts and investors also find other technical indicators like new high/ new low, RSI/ Stochastics, Bollinger bands, CBOE put/ call ratio, ISEE put/ call ratio, and VIX very effective and valuable.