Technical versus Fundamental Forecasting

While technical analysis concentrates on the study of market action, fundamentals analysis focuses on the economic forces of supply and demand that cause prices to move higher, lower, or stay the same. The fudamental approach examines all of the relevant factors affecting the price of a market in order to determine the intrinsic value of that market.The intrinsic value is what the fundamentals indicate something is actually worth based on the law of supply and demand. If this intrinsic value is under the current market price, then the market is overpriced and should be sold. If market price in below the intrinsic value, then the market is undervalued and should be bought.

Both of these approaches attempt to determine the direction prices that are likely to move. The fundamentalist studies the cause of market movement, while the technician studies the effect. Most traders classify themselves as either technicians or fundamentalists. In reality, there is a lot of overlap. The problem is that the charts and fundamentals are often in conflict with each other. Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at these critical times in the trend that these two approaches seem to differ the most.

One explanation for these seeming discrepancies is that market price acts as a leading indicator of the fundamentals. While the known fundamentals have already been discounted and are already “in the market”, prices are now reacting to the unknown fundamentals. Some of the most dramatic bull and bear markets in history have begun with little or no pereceived change in the fundamentals. By the time those changes became known, the new trend was well underway.

In accepting the promises of technical analysis, one can see why technicians believe their approach is superior to the fundamentalists. If a trader had to choose only one of the two approaches to use, the choice would logically have to be the technical. Because the technical approach includes the fundamental. Chart reading becomes a shortcut form of fundamental analysis.