Technical analysis has both conceptual and theoretical understanding (Levy, July 1966). Financial statistics play a major role in depicting the information to a share market analyst who in turn studies each and every compilation of financial reports in order to arrive at the intrinsic value of the earnings of a corporate company. The stock is recommended to be purchased only if the intrinsic value of the security is higher than the current market value of the security. The term “Technical” in the context of stock market analysis means to study the market in contrary to its external factors. Many tools for technical analysis have been found over the years. To assign intrinsic value to a stock certificate is considered pointless. The vast difference between the estimated value and the actual value has always been the rule. In short, the market analyst can know the current market price from the market itself as it provides him with all the primary information that he can hope to know. Price always tends to move in trends and they tend to change as and when the demand and supply changes. Hence, even the one with experience will find it of less significance. The analysis of financial and economic fundamentals must ultimately be the underlying foundation for security appraisal. Market prices will, in the long run, tend to move toward intrinsic values. Moreover, there is conceptual support for recommending technical analysis as a supplement to fundamental analysis for even the top professionals. Conceptual reasoning is never sufficient as there are many evidences that supports some random trends and models of the stock market and rejects the values obtained in technical analysis.
The process of selecting securities for investment has multi-dimensions (Hayes, September 1966). The dimensions are to be implemented where there are controversies. In a long-term prospect, the investment analysis is accepted. The revolutionization of implementation methodology has been forced upon. Although, the empirical data will suggest that those are wrong. The idea of using math models is not being considered while supporting the conventional analysis. Their usage cannot be stopped. Though they won’t serve the purpose much, they will be useful when calculating complex investment analysis. Many prominent economists have propounded by observing that investors instead of selecting the best long-term return yielding investments, are always behind the game of anticipating.
(Vaughn, June 1967) Suggest that, there are a lot of ways to improve the timing and profitability of stock investments. The most chosen ones before investing in stock are fundamental, undervaluation and technical approaches. A regular analysis can lead the investor to a much clear decision about where he should possibly invest in. The combination of approaches of undervaluation, fundamental and technical will have a much better result and better profit rather than choosing any one of these. In this research, six companies were studied. The result showed that when a desirable pattern of chart was formed, the sales and profits improved. Also, the multiples of the price-earnings were relatively low and showed a significant increase too. The investors should have a thorough knowledge about all these methods to invest wisely. They must test all the procedures hypothetically with usage of limited amount of fund until it is proved that these methods are desirable and successful. Only after which can they allocate these to the market.
While traditional approaches like fundamental analysis are more widely accepted, technical analysis which is also known as charting has not yet been used that much. One major disadvantage of technical analysis is that the figures and shapes used in it often keep flashing in the eyes of the investors. (Andrew W. Lo, August 2000) In his study, has proposed a model based on non-parametric regression on large U.S stocks for over 35years to analyse and conclude about how effective is technical analysis. When the comparison of daily stocks was made with the help of certain technical indicators, many have proved to have shown logical and pragmatic values.
There are two steps that bridge the financial data and fundamental analysis. One links it to the future profit earning and another to the value of the firm. Each of these steps will involve much number of factors that facilitate evaluation. (Cristina Abad, July 2004) Proposed a model that had many criterions related to data analysis techniques. Every stage of linear efficiency was fitted to the observed data. 30 stocks of a Spanish manufacturing industry for over 5 years were provided as a numerical example. The results suggested that the returns from stock market in Madrid were all normal. These were actually under-developed than the stock markets in the U.S. Hence, prices will be reflected only partially. New set of investigations were to be made in order to test if the abnormal returns were possible or not.
Andrew W. Lo, H. M. (August 2000). Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation. The Journal of Finance, 1705-1765.
Cristina Abad, S. A. (July 2004). Fundamental Analysis of Stocks by Two-Stage DEA . Managerial and Decision Economics, 231-241.
Hayes, D. A. (September 1966). The Dimensions of Analysis: A Critical Review . Financial Analysts Journal, 81-83.
Levy, R. A. (July 1966). Conceptual Foundations of Technical Analysis . Financial Analysts Journal, 83-89.
Vaughn, D. E. (June 1967). Combining the Undervaluation, Fundamental, and Technical Approaches to Security. The Southwestern Social Science Quarterly, 79-85.