Charting - A Technical Tool

CHARTING - A TECHNICAL TOOL

Technical analysts, while defining their own theory about stock price behavior and criticizing the fundamental school, do feel that there is some merit in the fundamental analysis also. But according to them, the method is very tedious and it takes a rather long time for the common man to evaluate stocks through this method. They consider their own techniques and charts as superior to fundamental analysis. Some of their theories, techniques and methods of

stock prices are given below:

Concepts Underlying Chart Analysis

The basic concepts underlying chart analysis are: (a) persistence of trends; (b) relationship between volume and trend; and (c) resistance and support levels.

Trends: The key belief of the chartists is that stock prices tend to move in fairly persistent trends. Stock price behavior is characterized by inertia: the price movement continues along a certain path (up, down or sideways) until it meets an opposing force, arising out of an altered supply-demand relationship.

Relationship between volume and trends: Chartists believe that generally volume and trend go hand in hand. When a major upturn begins the volume of trading increases as the price advances and decreases as the price declines. In a major down turn, the opposite happens; the volume of trading increases as the price declines and decreases as the price rallies.

Support and Resistance levels: Chartists assume that it is difficult for the price of a share to rise above a certain level called the resistance level and fall below a certain level called a support level. Why? The explanation for the first claim goes as follows. If investors find that prices fall after their purchases, they continue to hang on to their shares in the hope of a recovery. And when the price rebounds to the level of their purchase price, they tend to sell and heave sigh of relief as they break even.