Thoughts for beginners part 2: Fundamental and technical analysis are usually the same thing
I am more of a macro investor than individual stocks...not the best with those. I remember there were a bunch of questions that I had that confused me when I was brand new. A handful of CAPS players got me to where I am today, so I am offering my opinion on a few misconceptions. There will probably be about 10 of these blogs over the course of a few weeks.
Anyway, I wanted to debunk what I think is a myth, and that is that fundamental analysis and technical analysis are different.
Technical analysis is about finding market patterns that have had a high probability of working in the past, and applying them to the future. Some people say they are just a bunch of random squiggles. I say if psychologists can find and name disorders (commong pattenrs in people) then technicians can find and name trading patterns.
Now look at most forms of fundamental analysis. A lot of people use discounted cash flow, or some sort of model of earnings growth, or a p/e number, or for the overall market they use stock market total market cap versus GDP.
What is the difference between using a model that involves numbers like the above mentioned, to mathematical formulas like RSI, or MACD? They both equate to the same thing : " I buy when X happens".
Now things like "I think people will continue to eat mcdonalds in the future" are a little different, but they are usually based off of historical trends of how people behave....kind of like a price trend
What about seasonality? Or consumer sentiment? Consumer sentiment over 90 = contrarian sell. May = sell. These are "technical". It meets a criteria so you act on it.
Look at that chart...would you really think buying at the lower trendline is "just buying a random squiggle"?
Technical analysis is just another tool in the toolbox. I personally don't think theres a difference between liking a chart pattern trend a sales trend, or liking a p/e of 10 versus liking an RSI reading below 30 (both are oversold). I think they are two sides of the same coin.