Chapter 6: Security analysis

The aim of the analysis is to determine what stock to buy and at what price, there are two basic analysis
methods; i.e. fundamental analysis and technical analysis. Fundamental analysis is the cornerstone of
investing. In fact, some would say that you are not really investing if you aren't performing fundamental
analysis. Because the subject is so broad, however, it's tough to know where to start. There are an endless
number of investment strategies that are very different from each other, yet almost all use the
fundamentals. Fundamental analysis maintains that markets may misprice a security in the short run but
that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security
and then waiting for the market to recognize its "mistake" and re-price the security.
Technical analysis maintains that all information is reflected already in the stock price. It considers the
trends that are your friend' and sentiment changes predate and predict trend changes. Investors' emotional
responses to price movements lead to recognizable price chart patterns. Technical analysis does not care
what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.
Investors can use any or all of these different but somewhat complementary methods for stock picking.
For example many fundamental investors use technical’s for deciding entry and exit points. Many
technical investors use fundamentals to limit their universe of possible stock to 'good' companies. The
choice of stock analysis is determined by the investor's belief in the different paradigms for "how the
stock market works".
6.1. Fundamental analysis
Fundamental analysis of a business/investment involves analyzing its financial statements, its
management, competitive advantages, and its competitors and markets. When applied to futures and
foreign exchange, it focuses on the overall state of the economy, interest rates, production, earnings, and
management.
Fundamental analysis is performed on historical and present data, but with the goal of making financial
forecasts. There are several possible objectives of fundamental analysis. These are:
i) To conduct a company stock valuation and predict its probable price evolution,
ii) To make a projection on its business performance,
iii) To evaluate its management and make internal business decisions,
iv) To calculate its credit risk.
Components of Fundamental Analysis:
 Economic analysis;
 Industry analysis and
 Company analysis
6.1.1 Economic analysis
The economy is study to determine if overall conditions are good for the stock market. Is inflation a
concern? Are interest rates likely to rise or fall? Are consumers spending? Is the trade balance favorable?
Is the money supply expanding or contracting? These are just some of the questions that the fundamental
analyst would ask to determine if economic conditions are right for the stock market.
The macro-economy is the overall economy environment in which all firms operate. The key
variables/factors commonly used to describe the state of the macro-economy are:
 Growth rate of gross domestic product
 Industrial growth rate
 Agriculture and monsoons
 Savings and investments
 Government budget and deficit
 Price level and inflation

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  Interest rate
 Balance of payment, foreign exchange reserves, and exchange rate
 Infrastructure facilities and arrangements sentiments
6.1.2 Industry analysis
Industry analysis is a market assessment tool designed to provide a business with an idea of the
complexity of a particular industry. Industry analysis involves reviewing the economic, political and
market factors that influence the way the industry develops. Major factors can include the power wielded
by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.
Industry analysis is a market strategy tool used by businesses to determine if they want to enter a product
or service market. Company management must carefully analyze several aspects of the industry to
determine if they can make a profit selling goods and services in the market. Analyzing economic factors,
supply and demand, competitors, future conditions and government regulations will help management
decide whether to enter an industry or invest money elsewhere.
a) Economic Factors: Economic factors of industry analysis include raw materials, expected profit
margins and the interference of substitute goods. The cost of raw materials is an important factor in
industry analysis because over-priced goods will not sell in an established market. Profit margins are
closely linked to materials costs because offering discounts or sales prices will shrink company
profits and lessen cash inflows for future production activity. Substitute goods allow consumers to
purchase a cheaper good that performs relatively like the original item.
b) Supply and Demand: A supply and demand analysis helps management understand if enough
consumers are willing to purchase more goods in an industry. If demand is high and supply is low, a
company may be willing to enter the market and offer goods near the market price to gain a
competitive advantage in the industry. A trend of declining demand indicates an industry that is
oversold, and any new competitors will likely lose money because consumers are not interested in
current goods or services.
c) Competitors: The number of competitors is an important factor for proper industry analysis. If few
competitors exist in a market, they may be charging consumers higher prices because of limited
availability of products or services. As new competitors enter the market, existing companies can
lower prices to maintain their current market share; newer competitors may not be able to match these
price cuts if their products costs are too high. As industries contract, inefficient producers are forced
out.
d) Future Conditions: While no company managers can predict the future of an industry, they can try
to determine where the industry is in the business cycle. If the industry is in an emerging market
stage, companies can enter an industry and expect to earn a profit from rising consumer demand. If
the industry is in a plateau stage, then only the most efficient producers with the lowest costs can
continue to earn profits. At the end of a business cycle, demand is declining and producers leave the
industry for more profitable markets.
e) Government Regulations: Some industries have heavier regulations or taxes than others, which
must be considered by companies looking to enter new markets. Taxes and other government fees
add to the cost of doing business, which eats into profits earned by companies. Properly
understanding the amount of government regulation in an industry helps management to determine if
expected profit margins will earn a high enough return to cover these costs.
Techniques for evaluating relevant Industry Factors
Each industry has differences in terms of its customer base, market share among firms, industry-wide
growth, competition, regulation and business cycles. Learning about how the industry works will give an
investor a deeper understanding of a company's financial soundness.
i) Customers Base: Some companies serve only a handful of customers, while others serve millions. In
general, it's a red flag (a negative) if a business relies on a small number of customers for a large
portion of its sales because the loss of each customer could dramatically affect revenues.

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ii) Market Share: Understanding a company's present market share can tell volumes about the
company's business. The fact that a company possesses an 85% market share tells you that it is the
largest player in its market by far. Furthermore, this could also suggest that the company possesses
some sort of "economic moat," in other words, a competitive barrier serving to protect its current and
future earnings, along with its market share. Market share is important because of economies of scale.
When the firm is bigger than the rest of its rivals, it is in a better position to absorb the high fixed
costs of a capital-intensive industry.
iii) Industry Growth: One way of examining a company's growth potential is to first examine whether
the amount of customers in the overall market will grow. This is crucial because without new
customers, a company has to steal market share in order to grow. In some markets, there is zero or
negative growth, a factor demanding careful consideration. For example, a manufacturing company
dedicated solely to creating audio compact cassettes might have been very successful in the '70s, '80s
and early '90s. However, that same company would probably have a rough time now due to the
advent of newer technologies, such as CDs and MP3s. The current market for audio compact
cassettes is only a fraction of what it was during the peak of its popularity.
iv) Competitions: Simply looking at the number of competitors goes a long way in understanding the
competitive landscape for a company. Industries that have limited barriers to entry and a large
number of competing firms create a difficult operating environment for firms. One of the biggest
risks within a highly competitive industry is pricing power. This refers to the ability of a supplier to
increase prices and pass those costs on to customers. Companies operating in industries with few
alternatives have the ability to pass on costs to their customers. A great example of this is Wal-Mart.
They are so dominant in the retailing business, that Wal-Mart practically sets the price for any of the
suppliers wanting to do business with them. If you want to sell to Wal-Mart, you have little, if any,
pricing power.
v) Regulation: Certain industries are heavily regulated due to the importance or severity of the
industry's products and/or services. As important as some of these regulations are to the public, they
can drastically affect the attractiveness of a company for investment purposes.
In industries where one or two companies represent the entire industry for a region (such as utility
companies), governments usually specify how much profit each company can make. In these instances,
while there is the potential for sizable profits, they are limited due to regulation.
In other industries, regulation can play a less direct role in affecting industry pricing. For example, the
drug industry is one of most regulated industries. And for good reason no one wants an ineffective drug
that causes deaths to reach the market.
6.1.3 Company analysis
At the final stage of fundamental analysis, the investor analyzes the company. The Company is one's
perception of the state of a company - it cannot necessarily be supported by hard facts and figures. A
company may have made losses consecutively for two years or more and one may not wish to touch its
shares - yet it may be a good company and worth purchasing into. There are several factors one should
look at this analysis:
 Which company has performed well in comparison with other similar companies?
 Which company is performing well in comparison to earlier years?
 Which company is better by its management, policies, location and labor relations?
 Which company is the market leader by its productions and segment?
6.1.3.1. Objectives of Company analysis
Company analysis focuses on finding attractive firms by:
a) Analyzing individual firms.
b) Understanding each firm's strengths and risks.
c) Identifying attractive firms with superior management and strong performance (measured by
sales and earnings growth).
Stock selection focuses on finding attractive stocks by:

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 a) Computing each stock’s intrinsic value.
b) Comparing the intrinsic value to the stock’s market price.
c) Identifying attractive stocks, which are substantially undervalued.

6.1.3.2. Significant Factors to be Considered for Company Analysis

It is imperative that one completes the politico economic analysis and the industry analysis before a
company is analyzed because the company's performance at a period of time is to an extent a reflection of
the economy, the political situation and the industry. The different issues regarding a company that
should be examined are:
1. The Management: The single most important factor one should consider when investing in a
company and one often never considered is its management. It is upon the quality, competence and
vision of the management that the future of company rests. A good, competent management can
make a company grow while a weak, inefficient management can destroy a successful company.
2. The Annual Report: The primary and most important source of information about a company is its
Annual Report. By law, this is prepared every year and distributed to the shareholders. The Annual
Report is broken down into the following specific parts:
a) The Director's Report: The Director’s Report is a report submitted by the directors of a company
to its shareholders, advising them of the performance of the company under their stewardship
b) The Auditor's Report: The auditor represents the shareholders and it is his duty to report to the
shareholders and the general public on the stewardship of the company by its directors. Auditors
are required to report whether the financial statements presented do, in fact, present a true and fair
view of the state of the company.
c) The Financial Statements: The published financial statements of a company in an Annual Report
consist of its Balance Sheet and other statements.
3. Ratios: No person should invest in a company until he has analyzed its financial statements and
compared its performance in the previous years, and with that of other companies. This can be
difficult at times because:
(a) The size of the companies may be different.
(b) The composition of a company's balance sheet may have changed significantly.
Ratios can be broken down into four broad categories:
a) Profit and Loss Ratios: These show the relationship between two items or groups of items in a profit
and loss account or income statement. The more common of these ratios are:
1. Sales to cost of goods sold.
2. Selling expenses to sales.
3. Net profit to sales and
4. Gross profit to sales.
b) Balance Sheet Ratios: these deals with the relationship in the balance sheet such as:
(i) Shareholders’ equity to borrowed funds.
(ii) Current assets to current liabilities.
(iii)Liabilities to net worth.
(iv) Debt to assets and
(v) Liabilities to assets
c) Balance Sheet and Profit and Loss Account Ratios: These relate an item on the balance sheet to
another in the profit and loss account such as:
1. Earnings to shareholder's funds.
2. Net income to assets employed.
3. Sales to stock.
4. Sales to debtors and

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 5. Cost of goods sold to creditors.
d) Financial Statements and Market Ratios: These are normally known as market ratios and are
arrived at by relation financial figures to market prices:
1. Market value to earnings and
2. Book value to market value.
These ratios have been grouped into eight categories that will enable an investor to easily determine the
strengths or weaknesses of a company. Market value, Earnings, Profitability, Liquidity, Leverage, Debt
Service Capacity, Asset-Management/Efficiency, and Margin
It must be ensured that the ratios being measured are consistent and valid. The length of the periods being
compared should be similar. Large non-recurring income or expenditure should be omitted when
calculating ratios calculated for earnings or profitability, otherwise the conclusions will be incorrect.
Ratios do not provide answers. They suggest possibilities. Investors must examine these possibilities
along with general factors that would affect the company such as its management, management policy,
government policy, the state of the economy and the industry to arrive at a logical conclusion and he
must act on such conclusions.
4. Cash flow Analysis: In cash flow analysis, investors must always checks; how much is the
company's cash earnings? How is the company being financed and using it? The answers to these
questions can be determined by preparing a statement of sources and uses of funds. A statement of
sources and uses begins with the profit for the year to which are added the increases in liability
accounts (sources) and from which are reduced the increases in asset accounts (uses). The net result
shows whether there has been an excess or deficit of funds and how this was financed.
6.1.3.3. Company Analysis using the Relative Valuation Approach
The relative valuation approach of company analysis involves three steps:
i. Estimate future earnings per share (EPS) for the company.
ii. Estimate an earnings multiplier (P/E ratio) for the company.
iii. Therefore the future stock value is estimated as EPS x P/E ratio.
i. Estimate the EPS
Expected earnings per share are a function of the sales forecast and the estimated profit margin. Time-
series analysis is often used here.
Company sales forecast: It includes an analysis of the relationship of company sales to various
relevant economic series and to the company's industry series.
Profit margin estimate: You need to identify and evaluate the firm's Specific competitive strategy -
e.g. low-cost (the firm seeks to become the low-cost producer in the industry)? Differentiation (the firm
seeks to identify itself as unique in some attributes that are important to the customers)?
Internal performance: Relationship with its industry, which should indicate whether the company's
past performance is attributable to its industry or if it is unique to the firm.
EPS = (Sales x Net Profit Margin)/Number of Outstanding Shares
ii. Estimate the P/E
Assuming a firm has constant dividend growth rate, the value of its stock is determined by P = D 1/(k-g).
Therefore the firm's P/E ratio is: P/E = Payout ratio / (k - g), where the payout ratio is D1/EPS.
Analysts can use two approaches here, as in the industry analysis:
a) Macro analysis: Estimate a P/E ratio from the relationship among the firm, its industry and the
market.
 Identify the projected P/E multiples of the market and the industry.

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  Use time-series analysis to examine the relationship among the P/E ratios for the firm, the
industry and the market.
 Estimate the firm’s P/E ratio by adjusting the market or industry P/E multiple upwards or
downwards.
b) Micro analysis: estimate a multiplier based on three components:
 The dividend payout ratio (based on the firm’s dividend payout history, investment plans,
industry trend and current economic events).
 The required rate of return: consider fundamental factors and market-determined risk (beta) based
on CAPM.
 The rate of growth: use DuPont model.
6.2. Technical analysis
While fundamental analysis helps you decide what companies you may want to invest in; i.e. based on
the company's management, products and services, financial records, and other information. And it won't
always help you figure out when to buy, sell or hold. There will be times when the stock of a solid
company falters and times when a riskier company performs well. As a result, although fundamental
analysis is important, it's not always sufficient to make investment decisions. Technical analysis, the
study of price movements and trends, can help you figure out when to enter and exit the market.
Technical analysts base trading decisions on examinations of prior price and volume data to determine
past market trends from which they predict future behavior for the market as a whole and for individual
securities. Several assumptions lead to this view of price movements. In technical analysis, charts are
similar to the charts that you see in any business setting. I.e. The foundation of technical analysis is the
chart. A chart is simply a graphical representation of a series of prices over a set time frame.
Technical analysis is one of the oldest techniques used to make market decisions. Based on the ideas of
Charles Dow, technical analysts use a variety of technical indicators, or series of data points plotted on a
price chart that has been formed using price or price & volume statistics for a particular security over a
particular time period. The goal is to spot market trends and manage risks associated with price
movements.
While some indicators use complex formulas and others are simpler, all of them seek to establish visual
patterns that make sometimes confusing price data easier to understand and interpret. Indicators can be
applied to stock, indexes, futures contracts and any other tradable instruments whose prices move in
response to supply and demand.
While each indicator depicts patterns made by the price movements of securities, studying just one may
not give you a complete picture of the direction the price is likely to head. For example, an indicator may
make false signals, called whipsaws, where prices move in one direction and quickly revert to an original
trajectory. Examining more than one study makes it easier to spot true signals.

6.2.1. Assumptions of Technical analysts

Technical analysts base trading decisions on examinations of prior price and volume data to determine
past market trends from which they predict future behavior for the market as a whole and for individual
securities. Several assumptions lead to this view of price movements:
i) The market value of any good or service is determined solely by the interaction of supply and
demand.
ii) Supply and demand are governed by numerous rational and irrational factors. Included in these
factors are those economic variables relied on by the fundamental analyst as well as opinions,
moods, and guesses. The market weighs all these factors continually and automatically.

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iii) Disregarding minor fluctuations, the prices for individual securities and the overall value of the
market tend to move in trends, which persist for appreciable lengths of time.
iv) Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts, no
matter why they occur, can be detected sooner or later in the action of the market itself.

6.2.2. The Top Five Strengths of Technical Analysis

Technical analysis involves the use of charts and technical indicators to predict the price movement of a
currency. Many people (called technicians) swear by this approach to price forecasting while others
(called fundamentalists) won’t touch it. Most traders know that technical analysis has its advantages and
strong points, but that it also has limitations. Many foreign exchange (Forex) traders use charting
methods alone while others use a combination of approaches. Let’s examine the benefits of technical
analysis.
i) Technical analysis focuses on price movement. .
ii) Trends are easily found.
iii) Patterns are easily identified.
iv) Charting is quick and inexpensive.
v) Charts provide a plenty of information

6.2.3. Limitations of Technical Analysis

 The same tools for everyone:-With the democratization of information, most market players use
technical analysis software that relies on the same mathematical models.
 Lack of hindsight and reflection: - Monitoring the trend is an imperative, it follows a succession of
phases of increase or decrease manic, totally disconnected with the underlying reality.
 The classical figures do not work: - The sense of the individual manager is an afterthought because
"the market is always right" one is always wrong all cons.
 The volatility has taken over:-The volatility, the most senior-and-down of each session, has exploded
since January. It induces changes daily to a breadth of 5 to 8 times higher than the average.

6.2.4. Technical Indicator

Technical indicators, collectively called "technicals", are distinguished by the fact that they do not
analyze any part of the fundamental business, like earnings, revenue and profit margins. Technical
indicators are used most extensively by active traders in the market, as they are designed primarily for
analyzing short-term price movements. To a long-term investor, most technical indicators are of little
value, as they do nothing to shed light on the underlying business. The most effective uses of technical
for a long-term investor are to help identify good entry and exit points for the stock by analyzing the
long-term trend. In the context of technical analysis, an indicator is a mathematical calculation based on a
securities price and/or volume. The result is used to predict future prices. Common technical analysis
indicators are the moving average convergence-divergence (MACD) indicator and the relative strength
index (RSI).
In an economic context, an indicator could be a measure such as the unemployment rate, which can be
used to predict future economic trends. Common general economic indicators are the unemployment rate,
new housing starts and the consumer price index (CPI).
6.2.4.1.Moving Average Convergence
The moving average convergence divergence (MACD) is one of the most well known and used indicators
in technical analysis. This indicator is comprised of two exponential moving averages, which help to
measure momentum in the security. The MACD is simply the difference between these two moving
averages plotted against a centerline. The centerline is the point at which the two moving averages are

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equal. Along with the MACD and the centerline, an exponential moving average of the MACD itself is
plotted on the chart. The idea behind this momentum indicator is to measure short-term momentum
compared to longer term momentum to help signal the current direction of momentum.

MACD= (Shorter-term Moving Average) – (Longer Term Moving Average)

When the MACD is positive, it signals that the shorter term moving average is above the longer-term
moving average and suggests upward momentum. The opposite holds true when the MACD is negative -
this signals that the shorter term is below the longer and suggest downward momentum. When the
MACD line crosses over the centerline, it signals a crossing in the moving averages. The most common
moving average values used in the calculation are the 26-day and 12-day exponential moving averages.
The signal line is commonly created by using a nine-day exponential moving average of the MACD
values. These values can be adjusted to meet the needs of the technician and the security. For more
volatile securities, shorter term averages are used while less volatile securities should have longer
averages.
Another aspect to the MACD indicator that is often found on charts is the MACD histogram. The
histogram is plotted on the centerline and represented by bars. Each bar is the difference between the
MACD and the signal line or, in most cases, the nine-day exponential moving average. The higher the
bars are in either direction, the more momentum behind the direction in which the bars point.
6.2.4.2.Relative Strength Index
The relative strength index (RSI) is another one of the most used and well-known momentum indicators
in technical analysis. RSI helps to signal overbought and oversold conditions in a security. The indicator
is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is
overbought, while a reading below 30 is used to suggest that it is oversold. This indicator helps traders to
identify whether a security’s price has been unreasonably pushed to current levels and whether a reversal
may be on the way.

Figure: RSI Values

The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted to meet the
needs of the user. If the trading period is adjusted to use fewer days, the RSI will be more volatile and
will be used for shorter term trades

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6.2.5. Evaluation of Technical Analysis
While there are several ways those Forex traders to predict price movement, they belong to one of three
kinds of traders. They are either from the school of Technical analysis, fundamental analysis or they
make apply of both disciplines. While Forex trading can be carried out successfully with the utilization of
just one type of analysis, those that have a basic comprehend of both technical in addition to fundamental
analysis tend to be better equipped.
The foundation of technical analysis is based on volume, price along with past market data to establish
currency along with future price movements. Strict technical traders put their faith purely on these factors
with no consideration to external factors.
Yet, the way the charts are viewed and the Forex indicators employed for such an analysis are very
extensive. Technical analysis also includes support along with resistance, daily pivots, trend lines in
addition to pattern formations.
External factors such as economic data plus political news are not factored in. Trend lines in addition to
the methods employed to spot them play a huge part in technical analysis. A lot of effort as well as Forex
indicators in addition to tools are used to verify the continuation or reversal of the current trend. Because
technical traders respond to any change in the trend line, they generally open more trades than long term
fundamental traders do. They are usually composed of midterm along with short term traders. Having
said that scalpers can make use of both disciplines plus end up opening huge amounts of trades every
week. Scalping is a topic for another day however.
Technical analysis is employed by the vast majority of traders in any financial market today. The reasons
for this are straightforward. This is the case simply because technical analysis is easier to comprehend in
addition to employ that fundamental analysis. The trader does not need a good understanding of
economics.
Technical analysis appears to be a highly controversial approach to security analysis. It has its ardent
votaries; it has its severe critics. The advocates of technical analysis offer the following interrelated
arguments in support of their position.
1. Under the influence of crowd psychology, trends persist for quite some time. Tools of technical
analysis that help in identifying these trends early are helpful aids in investment decision
making.
2. Shifts in demand and supply are gradual rather than instantaneous. Technical analysis helps in
detecting these shifts rather early and hence provides clues to future price movements.
3. Fundamental information about a company is absorbed and assimilated by the market over a
period of time. Hence, the price movement tends to continue in more or less the same direction
till the information is fully assimilated in the stock price.
4. Charts provide a picture of what has happened in the past and hence give a sense of volatility
that can be expected from the stock. Further, the information on trading volume which is
ordinarily provided at the bottom of a bar chart gives a fair idea of the extent of public interest
in the stock.
The detractor of technical analysis believes that technical analysis is a useless exercise. Their arguments
run as follows:
1. Most technical analysts are not able to offer convincing explanations for the tools employed by
them.
2. Empirical evidence in support of the random walk hypothesis cast its shadow over the usefulness
of technical analysis.

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 3. By the time an uptrend or downtrend may have been signaled by technical analysis, it may
already have taken place.
4. Ultimately, technical analysis must be a self defeating proposition. As more and more people
employ it, the value of such analysis tends to decline.
5. The numerous claims that have been made for different chart patterns are simply untested
assertions.
6. There is a great deal of ambiguity in the identification of configurations as well as trend lines and
channels on the charts. The same can be interpreted differently.
To sum up, we are in a state where the market is either poised to recover, or go into a long term decline (a
change in the major trend). A failure of the head-and-shoulders formation in the National Index, which
could occur if the index clambers over 1,400 would be a good signal to suggest a market recovery, while
a breakdown below the support levels given for the leading Sensex stocks would suggest harsher times
ahead.
Despite these limitations charting is very popular. Why? It appears that charting appeals to a certain type
of personality; the collector. Listening to a chart list describe the satisfaction he derives from sitting down
after dinner with his charts for a few hours, one is reminded of the philatelist or lepidopterist. Finding a
certain pattern gives chart lists satisfaction that transcends the possibilities of turning the patterns into
money. John Magee, the guru of chart lists writes, ecstatically about the wonderful world of the
logarithmic spirals (which) contains so much of beauty and so much of the sheer wonder of pattern and
rhythm.
A pure chartist is almost monk-like in dedication, believing the essential truth about the market is to be
found in squiggles and figures on graph paper. He is unmoved by a plant explosion or a profit explosion.
A pure chartist believes what is my position on the practical utility of technical analysis? I believe that in
a rational well-ordered and efficient market, technical analysis is a worthless exercise. However, given
the imperfections, inefficiencies and irrationalities that characterize real world markets, technical analysis
can be helpful. But I do not believe it can be of great value. Hence, it may be used, albeit to a limited
extent, in conjunction with fundamental analysis to guide investment decision making.
6.2.6. General Steps to Technical Evaluation
Many technicians employ a top-down approach that begins with broad-based macro analysis. The larger
parts are then broken down to base the final step on a more focused/micro perspective. Such an analysis
might involve three steps:
i) Broad market analysis through the major indices; such as the S&P 500, Dow Industrials, NASDAQ
and NYSE Composite.
ii) Sector analysis to identify the strongest and weakest groups within the broader market.
iii) Individual stock analysis to identify the strongest and weakest stocks within select groups.
The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are
universally applicable, each of the analysis steps above can be performed using the same theoretical
background. You don't need an economics degree to analyze a market index chart. You don't need to be a
CPA to analyze a stock chart. Charts are charts. It does not matter if the time frame is 2 days or 2 years. It
does not matter if it is a stock, market index or commodity. The technical principles of support,
resistance, trend, trading range and other aspects can be applied to any chart. While this may sound easy,
technical analysis is by no means easy. Success requires serious study, dedication and an open mind.

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