Fundamentals behind technical analysis
by Curtis McKallip Jr.
Would you believe you are doing fundamental analysis without knowing it when you use technical
indicators? No, not GNP, PPP, GPD, J-curves or deflators. That stuff is for government policy makers.
Fundamental supply and demand analysis is often ignored. Not because it is wrong but because the
information isn't there.
You can get hourly price quotes off your satellite dish, but can you find out how many soybean plants
were planted at 2 p.m.? (And how much would the exchanges charge for it?) If you could get this
information it might be very useful and there is a way to guess at short-term supply and demand by
working backward from price charts.
If you are using technical analysis, you are implying certain properties to these curves whether you are
conscious of it or not. One property of supply and demand, called elasticity, changes over time. This can
cause your technical trading system to stop working. Elasticity is covered in basic economic texts and,
basically, it refers to consumer loyalty to a product as price changes.
First, study Figure 1, which compares the static view some technical traders have of markets and the
more complex reality of dynamic price patterns. The dynamic model is one of punctuated disturbances
followed by periods of equilibrium. In the dynamic view, equilibrium persists until it is disturbed by new