Technical and Fundamental Analysis of the Stock Market

Technical analysis is the use of price and volume charts to forecast buy and sell signals in financial markets. The Efficient Market Hypothesis (EMH) says that market prices already reflect all we know about a stock--that is, full information--and therefore we cannot use such price information to further forecast what will happen to a stock. In other words, if a stock price pattern were to forecast that a price is going up, then the price would already be up and there would be nothing left to gain.

What I just described above is the EMH in the "Weak Form." The EMH comes in a semi-strong and a strong form as well. The semi-strong form of the EMH states that stock prices reflect not only past price and volume information, but they ALSO reflect all public information about a company that can be gleaned from a firm's annual report, news releases, and current and future potential projects. The strong form of the EMH states that stock prices reflect all the information covered by the semi-strong form AND all private information as well, that is secret deals of mergers and future product launches that other investors do not yet know about.

We generally don't believe that markets are efficient in the strong form. How do we know? Because once in a while, we see news stories about someone who got caught making a killing by trading on material non-public information.

As for the semi-strong and the weak forms of the EMH, well, we don't all agree.

In the semi-strong form, investors who try to select investments based on dividends or earnings are basically saying that they think they can outperform the market by evaluating fundamental data and buying the "right" stocks. In the weak form, investors who follow the trading patterns described in the infographic below, are saying that they can outperform the market by evaluating price and volume trends and buying the "right' stocks.

For discussion:

What do you think? Do you believe you can extract enough information from a candlestick chart to buy and sell at the right time? Why or why not?