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<<I tend to agree that looking at price/volume without the indicators probably works best in terms of learning the basics and getting a grip on the fundamentals of TA>>

<<you should be able to make all of your calls just looking at the price action and the volume since all the indicators are just based on these 2 pieces of data.>>

Ordinarily I'd let these statement go because they're so close to right that to comment on them would amount to niggling. But there are an awful lot of new people hanging around, and even a slight wobble in the axis can eventually send the planet careening off into the sun. So let's start, if possible, with a reasonably clean slate.

First, price/volume has to do with charting, and, in a sense, with technical analysis. It is not, after all, fundamental. But I don't want anyone to get the idea that charting and technical analysis are the same thing. Technical analysis is an umbrella for a variety of approaches to interpreting all those little squiggles, and the various champions of one approach or another do not necessarily invite each other over for dinner on a regular basis.

Second, not all indicators are based on price and volume. Some are based on price alone. Some are based on volume alone. Some are based on mathematical tortures that are so complex that the indicator may just as well be based on a fevered nightmare brought on by bad tacos in a border cantina.

Some time ago, I made several posts on the Gorilla Game board which had three goals: one, to explain how technical analysis differed from fundamental analysis and to point out the sins committed by both camps; two, to note the three chief divisions of technical analysis; and three, to explain the difference between valuing a stock and valuing a company. I've combined those posts in what I hope is a not too clumsy way and copied it here since it really doesn't fit anywhere on the site. To anyone who's approaching this for the first time and who doesn't follow the GG board, these points may provide some small degree of light on the path:

A spreadsheet is a record of a company's financial behavior. It may be restated into a P&L or an income statement or whatever, but it usually begins as a spreadsheet. It tells you (or at least is supposed to tell you) where the money is coming from, where it's going, what management is doing with it, how it's being husbanded. A good detective, often an accountant, can tell you with impressive accuracy just what's going on in that company by tracking the flow of money hither and yon.

A chart is a record of a stock's price behavior or, more accurately, the behavior of those who are interested in buying or selling the stock. It tells you who's interested in buying it, how many buyers there are, what price they're willing to pay (there have been many reasons advanced for the collapse of the Nasdaq in 2000, but the chief reason for the collapse was simply that the market ran out of people dumb enough to pay those prices; when the selling began, there were no buyers left on the field). It also tells you the same things about whatever sellers there may be in the house. But rather than do it with cells in a spreadsheet, it does it with a bar showing the opening price for the day and the low, high, and closing prices for the day. Combined with the number of shares traded and a knowledge of the psychological and sociological significance of the relationships of these elements to each other, one can reach some pretty accurate conclusions about demand and supply. And since demand is what makes the price go up, this is worth knowing.

That, in its simplest form, is what a chart does and it is all that many chartists care about, including those who are interested in the CANSLIM strategy. Quite a few chartists, however, go beyond this into patterns. Even CANSLIM urges the investor to become familiar with the most common and most productive patterns, such as a flat base. But the pattern people, unfortunately, go far beyond those simple patterns which have demonstrable psychological importance and sail into the realm of what is often silly. Since the predictive validity of many of the more esoteric patterns is debatable at best, discussions of them alienate many investors who might otherwise gain valuable insights into how markets behave through an understanding of basic charting.

But the third element of charting - that of technical analysis and the use of "indicators" - is where the unwary beginner is pulled through the looking glass and is either persuaded that all he has to do to attain quick and easy wealth is to become expert in the use of RSI, MACD, MFI, OBV, IRT and QED, or is confused so thoroughly with all this that he becomes convinced that anything having to do with charting in any way whatsoever is just so much hokum and not worth the attention of the serious student of markets and investing.

Hokum, however, is not the sole province of the technician. Fundamentalists must share in this guilt to at least some degree. Those with long memories will remember that, at one time, investors flocked to equities for the dividends, their way of sharing in the profits of the companies which they had selected. For reasons with which you are all familiar, dividends dropped to the bottom of the list as criteria for investment. Investors wanted growth, and growth companies rarely pay dividends. Rather they put that money back into the company to fuel further growth. Therefore earnings, not dividends, became the touchstone.

The problem with earnings, however, was that they became much too important and eventually became far too easily manipulated (the infamous "beat expectations by a penny"). "Whisper numbers" became a hastily and crudely fashioned tool to get at the meat of the earnings numbers, but were doomed to failure. Now with basic, non-basic, diluted, undiluted, before extraordinary items, after extraordinary items, blah blah blah, even the experts have difficulty determining what the earnings are. So to revenues and the PSR.

But even the use of revenues has not been clear sailing since creative accounting apparently has no bounds. Many companies consider orders to be revenue and book revenues long before the cash is actually in hand. And what if the company is young and hungry and aggressive? What if it is more concerned with market share than with pleasing the accounting fraternity? Is this not the crucible from which gorillas are ultimately forged? Hence the PVR or Price to Vision Ratio.

When it comes to bizarre forms of reasoning, fundamentalists have as much to answer for as technicians.

I encourage anyone who has been turned off by charts - or who has been turned off to charts by others - to look at them again with a fresh viewpoint as records of transactions, not as mysterious petroglyphs whose meaning can only be determined through the tossing of chicken bones and the waving of rattles. Even the so-called Long Term Buy & Hold investor would do well to keep an open mind to the possible value of charts for a number of reasons:

One, valuing a company and valuing a stock are two entirely different processes. Whatever valuation methods you choose for one may be completely inappropriate for the other. Determine first your reasons for buying the stock and the choice of valuation method might be more easily made. If you have determined your reasons for buying a share in the company and found them to be compelling, you may yet find that the price of that share is currently beyond all reason.

Two, even the very best companies have variable growth patterns and growth curves. Many stocks have recently had parabolic rises followed by declines that even the word "plummet" fails adequately to describe. CANSLIM, the Gorilla Game, and similar approaches are designed to help the investor avoid these traps and focus on those companies that will do well over the long term. But over that long term there will be periods of hypergrowth, periods of seeming stagnation, periods of tentativeness, periods of decline. Throughout these periods it is critical to remember the difference between the company and its stock. Whether one wants to participate in the declining periods as well as the hypergrowth periods is a matter of personal choice, but the "long-term" investor should not assume that the slope will be ever upward without pause, and those pauses can sometimes last for years.

Three, market and stock timing are not impossible, no matter what you've heard. They are difficult and time-consuming, but not impossible. Most people don't want to mess with the process and rightly so. It's a job in itself - but no more difficult than learning how to do a thorough fundamental analysis - and should not be attempted by anyone who is not suited to it.

Four, if nothing else, a chart tells you what value buyers and sellers have agreed upon at a particular point in time regarding a particular stock. This point in time can be a minute, hour, day, or year, but during that period this is what the "market" has decided that the stock is worth. However, this need not have anything to do with the value of the company. Your belief that the stock is worth more will not budge the price one iota.

Five, many "long-term" investors avoid companies like AMAT because they are "cyclical". However, all stocks are cyclical in their own way, particularly if they follow the group, sector, sub-market and market cycles of which they are necessarily a part. Those who want to take the time and effort to understand these cycles can sell near the tops of these cycles, providing themselves with the extra cash to buy back the same stocks in the same companies when those stocks reach the bottoms of their cycles. Those who don't want to fool with it certainly don't have to, but one should take care to avoid the "it's not in the Bible so it's not allowed" point of view. If nothing else, even a superficial understanding of the stories which charts tell will prevent the novice from buying stocks at overextended levels, watching them sink, and remaining underwater for months or even years before getting back to a breakeven point.

Valuation is complicated and cannot be applied to company and stock alike without running into a lot of head-banging, and valuing the company and the stock separately through fundamentals on the one hand and the chart on the other won't necessarily make reconciliation any easier or faster. But by incorporating both fundamentals and technicals into your valuation and selection process, you will at least have a clearer focus of your opinion of the value of the company and of the market's opinion of the value of the stock and be able to arrive at a more reasonable and rational determination of the best entry point into the stock you want to buy or the best point at which to buy more of what you already have.

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