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1. Why I wrote this article and what is technical analysis. (Below)

2. My technical analysis of the S&P500 as of 8/1/02.

3. Technical analysis, as of 8/1/02, using Fibonacci numbers, a technical indicator used by many analysts.

4. Technical Analysis, as of 8/1/02, using P&F charts. 

Why I wrote this article:

On June 6^th, 2002, in my Stock Market Returns article, I talked about how the economy was likely going to face years of minimal economic growth and poor investment returns in the near future.  At that time, when the S&P 500 was trading at approximately 1050, I also stated my disdain for Wall Street analysts that were forecasting a huge surge in the S&P 500 for the remainder of the year.  Some were giving target prices of 1300 (over a 20% return in a six month time horizon!), much to my horror.  Since I wrote about the stock market and its woes on June 6^th the stock market is down over 20%.  It has been nothing short of a market meltdown.

I am concerned about economic growth.  Forget GDP growth.  I want to see top line corporate results growth.  Economic data can be fudged every which way known to man.  Top line growth, across a broad spectrum of U.S. corporations, such as those included in the S&P 500, is much more difficult to fudge.  Don’t get me wrong, companies can inflate revenues (Enron & Medco are two recent examples) but a diverse gauge of public companies should provide some indication of true economic growth in the U.S.  As of today I have yet to see any meaningful top-line growth in corporate America.  Top line growth is essential to justify the EPS models that many analysts have forecast for the next 12 – 24 months.

In this particular article I want to spend some time looking at some stock charts using technical analysis, a method of looking at stocks based on market direction and sentiment. 

So what is technical analysis and why is it important?  

Technical analysis is the examination of past price movements to forecast future price movements. Technical analysts are sometimes referred to as chartists because they rely almost exclusively on charts for their analysis.  Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low or close for a given security over a specific timeframe. The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action.

Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical. Psychological or logical may be open for debate, but there is no questioning the current price of a security. After all, it is available for all to see and nobody doubts its legitimacy. The price set by the market reflects the sum knowledge of all participants, and we are not dealing with lightweights here. These participants have considered (discounted) everything under the sun and settled on a price to buy or sell. These are the forces of supply and demand at work. By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it going?

Given this brief explanation of technical analysis, " Are there any technical indicators of value to the individual investor?" - For those answers check out sections 2, 3 & 4.

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BetterBizBooks.com is founded and operated by Dan Ross and is an personal website to provide independent and public research. This report is provided as a public service. All information provided must be understood as opinion only and is not investment advice. All statements and expressions are the opinion of BetterBizBooks.com and are not meant to be a solicitation or recommendation to buy, sell, or hold any form of investment vehicle. Any opinion made by BetterBizBooks.com is based on raw data and reports that have been presented by independent government agencies, private industry associations and other sources.  BetterBizBooks.com makes no representation or warranty as to the accuracy of the information provided. The information provided should only be used as a research tool.  Reading of this document constitutes your acceptance of these terms and conditions.

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