The stock market is a data-intensive landscape. Everything is represented via numbers, and every number is constantly in motion. Which means, software comes into play. Especially technical analysis software.
The analysis of those numbers comprise the sum total of all stock research, even when the intangibles of a company don’t seem to be numerical in nature, like the quality of their products. In the end, even those soft variables translate to numbers by way of forecasts of data such as revenue, profits and the need for capitalization.
This research comes in two flavors: fundamental and technical.
Fundamental analysis is where those soft issues are found, amidst a sea of hard numerical data. Fundamental analysis is the study of a company’s health, the trending of their financial strength as represented by profits, margins, expenses, trending, and net capitalization, all of it in context to forecasts.
The result is a picture of how the company stands to fare, both in context to the market, and in comparison to its competition, going forward. The results of this analysis bear directly on investor supply and demand, which is the determinant of stock price levels and movement.
But fundamental analysis comprises only half of the research game.
The other half is called technical analysis.
Technical analysis looks at the historical trading ranges of a stock, putting it in context to the market in general. Baring outside influences (which usually come from the fundamental side, i.e., profit forecasts are slashed), a stock trades within a given range, establishing upper and lower boundaries.
All things being even, when investors sell off a stock the price drops accordingly. There comes a level – again, barring news that supports a downward trend – at which investors will regard the lower price as a buying opportunity, thus bringing fresh buy-side demand back into the market. This, in turn, stabilizes and then strengthens the stock, propelling it back up into the trading range.
The reverse also true.
When the price reaches a certain level, investors will take their profits by selling, thus establishing the upper end of a trading range. This puts sell-side pressure on the stock, sending it back down into it’s trading range.
When a stock violates these upper and lower limits, it’s known as a “breakout” stock, the price then being less subject to prediction based on a lack of data. This is new territory, and there’s nothing to say that investors will stop buying at a given level. Or in reverse, stop selling it off. Sooner or later the same factors that determine the former upper and lower trading limits kick in – investors smell a buying or selling opportunity and begin to buy or sell into the prevailing momentum.
None of this has much at all to do with the company whose name is on the stock certificate.
There are software programs that track this price performance data, and in great detail. They analyze demand and supply volumes, including backlogged bids and offers, juxtaposed against established trading ranges based on historical data for that stock. When the limits are approached, the software flags this stock as a buy or sell opportunity, allowing the human operator to determine if a breakout is likely based on any relevant news.
These programs are available either as a service bought via subscription, or you can buy them yourself, though they are quite expensive. They are a valuable tool for short term investors and traders, while longer term investors pay much less attention to trading ranges.
For them fundamental analysis is much more relevant, because today’s trading ranges have little relevance to the stock years down the road.
Unless they are planning on buying in or selling soon. In that case, everybody loves a bargain, and technical analysis software is a tool that can help you find one.
