From the August 01, 2008 issue of Futures Magazine • Subscribe!

Funny-mentals

“Human sacrifice, technicians and fundamentalists living together... mass hysteria!”

Alright, so maybe Dr. Peter Venkman (a.k.a., Bill Murray) didn’t foretell exactly that in the 1984 movie Ghostbusters, but such a proclamation would have been just as ominous.

Over the years, the relationship between technicians and fundamentalists, who examine supply and demand data to forecast future prices, has been just as strained as that of felines and canines, with both often derisively attacking the others’ approach. Technicians call fundamentals “funny”mentals. Fundamentalists refer to technical analysis as “voodoo science.”

Some put a bit more effort into their arguments, such as the following quote from Technical Analysis of Stock Trends, the 1957 book by Robert Edwards and John Magee that many consider the bible of the discipline: “In brief, the going price as established by the market itself comprehends all the fundamental information which the statistical analyst can hope to learn (plus some which is perhaps secret from him, known only to a few insiders) and much else besides of equal or even greater importance.”

In recent years, however, many traders have been breaking rank. This growing class of trader knows no loyalty but the bottom line, employing both fundamental and technical analysis to decide where and when to risk available margin money.

An often-employed approach involves using fundamental analysis to determine a general market bias and using technical analysis to subsequently enter a position in the direction of that bias. For many who can handle the extra analytical load, it’s an approach that works. The mere number of traders using technical analysis and the impact of their market positions requires every trader to try and figure out what they are up to. As one trader once told Futures regarding a popular technical approach, “When that much money is chasing the market, it is a fundamental.”

Of course, this does raise one warning. Keep one eye on the horizon. The Stay Puft Marshmallow Man can’t be far behind.

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