Technical analysis is the use of security price movement and volume statistics to determine future price movement of a stock. A technical analyst is unlike a fundamental analyst, as they are not concerned with the financial status of a company. The technical analyst uses charts, graphs and computer base models to project the movement of the price of a security over time. The technical analyst uses the technical information available to them to try to spot trends over the short and intermediate terms for a security. Once they have identified a trend for a security, they confirm the trend and react accordingly in the market. It is the belief of the technical analyst that price movement trends tend to repeat themselves.

A technical analyst will chart stocks using the moving averages in the market for each. On each successive day, the final closing price of the security will be added to the moving average at the close of the market. Chartists use 90-day moving averages, 120-day moving averages and 200-day moving averages as an example for a security. As each day passes, the oldest price of the moving average is dropped, and the most recent closing price is added to the average. As the chartists study the moving averages for a security, they look for resistance levels and support levels to determine the upper and lower limits for the stock.

The resistance level for a security is the highest price the security has reached in the moving average, and is considered the current ceiling for that stock price. This is typically the price that the security has been unable to break through in the market. In other words, the security has resisted further advances from this price. If the security price should break through the resistance level, the technical analyst considers the break to be a strong bullish indicator for the stock. A security's support level is the price the technician who has charted the security's moving average believes it will not fall below. This is the price at which the stock is stable. In other words, the security has declined in value to a level that does not allow for further decline.

If the security price should break through its support level, it is considered a bearish indicator to the analyst. Technical analysts use any market information that can be readily charted when making a determination on the future price movement of a security. This could include the following information that is made available on the market. Advance Decline Ratio The advance decline ratio measures the number of New York Stock Exchange listed stocks that have increased in price during a given trading day against the number of NYSE stocks that have declined in the same day.

The technical analyst also uses volume measures in their analysis of statistical data. Volume measures are reported daily by each respective exchange for individual stock issues and total volume. A technical analyst analyzes this information very closely as they chart the volume of traded securities. Sharp increases in reported volume are typically representative of demonstrable increases or declines in stock prices. The market is overbought when volume on the exchange is decreasing and the market is still going up. Conversely, if the market is falling on decreasing volume it is oversold. A market that is overbought is considered a bearish indicator leading to future falling

prices, while an oversold market is considered a bullish indicator of future rising prices. Technical analysts use charting as a way to determine the future price movement of a security. When the security rises to a price that passes through its resistance level, this occurrence is known as a breakout. What this means is that the stock has broken through its upper price level. When the stock breaks through its resistance level, a technician will have enough proof of an established trend to believe that the security will continue to follow in the same direction of the breakout.

Technical analysts and fundamental analysts approach securities differently. Technicians base their decisions on the statistical data they have charted, regardless of the financial condition of the company. Fundamentalists base their investment choices strictly on the reported financial condition of the company. The argument as to which strategy is the correct one to follow will continue for as long as investors buy and sell stocks in the market. Fundamental analysis is the analysis of the balance sheet and income statement of a company by an analyst by the use of comparative ratio analysis taken from the information provided by these accounting statements.

Fundamental analysts use this information to make educated predictions on the future prospects of a company. By looking at assets, liabilities, management structure, product lines, sales, and the overall position in their respective industries, the analyst can determine the value of a company based on its past performance. Some companies are considered to be overvalued, while others are deemed to be undervalued in the current market. This determination comes from the actual comparison ratio analysis that the analyst conducts for a company. A fundamentalist makes this determination based strictly on the facts before him. A fundamental analyst also looks at the state of the overall economy and considers which industries show the best prospects in the foreseeable future.

Some of the things a fundamental analyst would consider include: Assets Liabilities Income Book Value Assets are anything of commercial value that a company either holds or owns and is designated as such on their balance sheet. Assets can have various designations, such as current assets, long term assets, or even intangible assets. The liquidity of each asset is measured by how quickly the perceived asset can be converted to cash. A current asset can be converted to cash much faster than a long-term asset. We will explore the designation of assets next.

Current Assets Current assets are those assets that are owned by a corporation that can be quickly converted to cash. These assets are considered current if they can be expected to be converted to cash for the company within the business fiscal year. The basic designations for current assets are as follows: Cash Marketable Securities Accounts Receivable Inventory

Long term assets are assets of a company that cannot be converted into cash within a reasonable period of time. These include all fixed assets owned by the company. Fixed assets are generally made up of: Land Plant & Equipment Long term fixed assets have a useful life expectancy for a company. Fixed assets can be depreciated in value each year, based on the useful life of the asset. All fixed assets, with the exception of land, are depreciable. Land is not a depreciable asset because it will always be useful and of some value to the company.

Fixed assets can be depreciated by either straight line depreciation or accelerated depreciation. Intangible assets are those assets that the company has either rights to or control over. Intangible assets include: Patents Copyrights Trademarks and Goodwill As non-physical entities that benefit the company intangible assets are difficult to value. For instance, the value of goodwill can only be determined if the company is sold, in which case any premium that a buyer would be willing to pay for the company could be construed as the value of the intangible asset of goodwill.

Current liabilities are what the company owes to creditors, vendors and any other entities, such as the IRS for taxes. Current liabilities can be broken down into the following categories: Accounts Payable Salaries Taxes Interest on Debt A company's long term liabilities are any long term borrowing that the firm has secured for expansion, including Bonds and Preferred Stock

The term financial statements refers to the balance sheet, income statement, and statement of changes to retained earnings for a company. A fundamental analyst uses a company's financial statements, past performance, and future expectations to analyze its prospects. The balance sheet looks at the company at a specific date in time, typically year end. The income statement looks at the company over a period of time (typically on a quarterly and yearly basis). It will give the analyst an overview of how the company has fared over a period of measured time.

The balance sheet for a company is the picture of the company at a specific date in time (typically at the fiscal year end). The balance sheet will list the total assets and total liabilities and shareholder equity for the company. The balance sheet has two sides to it. The asset side and the liability/shareholder equity side. Both sides of the balance sheet must be equal (balanced) to show what the company owns and what it owes. An income statement is also known as the profit and loss statement for the company. It looks at a company’s financial picture over a stated period of time. This may be on a quarterly basis or for each fiscal period. The income statement will show what a company has spent and sold over the prescribed time period. Fundamental analysts use

analysts use income statements to determine how effective the company is at managing their sales in relation to their costs and expenses for the period under examination. Book value is the calculation of what a company’s shares of stock selling in the market are actually worth. Many fundamental analysts compare the book value of a stock with its market value to find undervalued securities in the market. Book value is computed as: Total Assets - Intangible Assets - Current Liabilities - Long Term Liabilities = Book Value for the Company

Common Ratios Working capital is the available funds that the company can use to conduct its business and pay its bills. It will measure the liquidity factor for the company. In other words, how readily available is cash for the company to conduct their business. The formula for working capital is: Current Assets - Current Liabilities = Working Capital Current Ratio The most common ratio that is used for computing working capital is the current ratio. It is a measure of the firm’s liquidity picture.

The company’s current assets divided by its current liabilities will determine its current ratio. A current ratio of greater than 1 is mandatory for a company to be considered to have a positive working capital. CURRENT RATIO = Current Assets/Current Liabilities Acid Test Ratio A more stringent test of the liquidity of the company is measured by the acid test ratio. The acid test ratio will use the same formula as the current ratio, except the least liquid of current assets, which is inventory; will be subtracted from the current assets, and divided by the current liabilities of the company.