V.7:11 (396-399): Fundamentals behind technical analysis by Curtis McKallip Jr.

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 events.