The Hindu Business Line : Trader's Corner

The second tenet of technical analysis is that `price discounts everything'. To accept this tenet, one needs to spend at least a few years poring over the industries and companies' performance data, trying to correlate the stock price moves to such numbers. The frustration that this exercise leads to, will lead to dawning of the ultimate truth — price is determined by not just fundamental but political, psychological, economic and even manipulative factors.

That is the reason why most technical analysts believe that study of the market price is sufficient in forecasting the future trend in prices. If the stock is in an up trend, it means that the factors affecting the price are bullish — so demand is greater than supply. The reverse is true in a downtrend i.e. the factors affecting the price are bearish — so supply is greater than demand.

One of the reasons for the superiority of the study of market action is the inefficient nature of our stock markets where information is not disseminated evenly to all. Insiders who buy and sell based on news and information that is known to a select few cause sharp and unaccountable fluctuations in price.

The technical analyst can accept the sharp spike in price as a breakout and trade on it, whereas a fundamental analyst would have qualms about buying a stock without understanding why the price is moving in such a fashion. A sizeable portion of the move might be missed before such an understanding is achieved.

But this tenet is not infallible. Market action is at times entirely manipulative and undertaken by unscrupulous entities with the sole intention of luring naïve investors in to the counter. Technical indicators give false signals in such phases. They can also fail to give advance notice of an impending crash.

There are two ways in which such stocks can be dealt with. The easier recourse would be to avoid trading in such stocks. The second way out would be to move in and out of such stocks quickly, i.e. keep booking profits at every ascent.

Lokeshwarri S.K.

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