Driving a Comparison Between Fundamental and Technical Analysis
The movie Vantage Point begins by playing out the same scene over and over again, each time from a different vantage point as experienced by each major character. From such a portrayal or depiction, the viewer can easily see that one's vantage point largely influences one's perspective. Likewise, the fundamentalist and the technician have similar objectives in analyzing securities. Their views are, however, developed from different vantage points. An analogy can be drawn between a fundamentalist and a technician who both examine a high-performance automobile. The fundamentalist looks under the hood, kicks the tires, and inspects the frame—the physical aspects of the car. The technician does not look under the hood. Rather, he evaluates how the car performs under a set of conditions, such as turning, accelerating, and shifting. The fundamentalist examining the engine notices a potential flaw in the engine design. Similarly, when the gauges exceed the threshold of the expected parameters, the technician is led to the same conclusion as the fundamentalist, but without a physical inspection of the engine.
A fundamentalist might identify a good valuation point of a stock based on his analysis of the company. The technician observing the actions of market participants through the stock's movements might identify the same price level as a potential support level. What is support? Support is demand (buyers). So where does this demand come from? Often, it originates from the fundamentalist's determination of value. In this way, the two perspectives often yield the same conclusion using different methodologies. One opinion is based on the search for intrinsic value, whereas the other is shaped by extrinsic behavior.
Whatever one's vantage point, price goes up for only one reason: Demand has surpassed available supply. When the available supply outweighs demand, the price must go back down. Volume is the scale weighing these forces of supply and demand that produce price. In this way, volume ultimately reflects the ebb and flow of money into and out of the market or the security. Therefore, my belief is that volume analysis provides a superior view of the market's internal structure that other forms of analysis do not offer. This book explores the market from this underemployed perspective of volume analysis, providing an investor with the tools and concepts to advance his or her own abilities in evaluating the market.