You don't have a crystal ball. And you don't have psychic abilities. So when it comes to predicting Wall Street, you only have a couple of tools to help you gauge what the stock market might do.
First there's "fundamental analysis," which involves analyzing the characteristics of a company in order to estimate its value (evaluating the company's business model and key numbers in earnings reports).
The second, "technical analysis," is focused on price (specifically a stock's movement in the market), not valuation. To become a technical analysis master, you must accept these 3 core tenets:
1. Market is the master
Don't question the market—all known information about a stock is immediately reflected in its price, which is determined by its buyers and sellers. So if a popular clothing chain's quarterly earnings report reveals a sales drop because of see-through yoga pants, many investors sell their shares, and that change is represented by the (now lower) stock price.
2. Prices are trending
More specifically, prices move in trends. The ups and downs of a stock chart may look random, but the price tends to move in observable trends—and price movements are more likely to follow those trends than conflict with them. Historically, a fashion retailer's shares tend to rise in the 4th quarter in anticipation of holiday sales, and that's likely to continue as long as holiday shopping exists.
3. History repeats itself
Just as your high school history teacher told you, you've got to study the past. Many of the charts' patterns in technical analysis have been used for more than 100 years because those trends keep repeating themselves. So when you're looking at graphs highlighting low oil prices over the 20th century, you can feel more confident that automobile stocks rise as fuel prices fall.
Technical analysis isn't perfect. It's not exact science or the product of flawless technology. This is just one tool to help you study stock price patterns to improve your anticipation of a stock's future movement. Always make investment decisions based on your own objectives, risk tolerance, and financial situation, but keep technical analysis in your back pocket.
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