Stock Trading Strategies > Technical Analysis > Chart Patterns

Price Is Not Random

Those in opposition to technical analysis suggest that price is the end result of all that is known about the underlying security at any given point in time and since this body of knowledge is constantly evolving it is impossible to predict price with any degree of success. They would have us believe that price is random.

If one looks at a price chart objectively it is hard to make this flawed argument. Price is not random, it consists of periods of consolidation when supply and demand for the security is in relative equilibrium and periods of rapid price movement (trends), when there is an imbalance between supply and demand.

Consider the case of Visx Inc. (VISX) in early 1999. (fig. 1a)

In early 1999 Visx Inc. (EYE) became a very hot stock. The maker of laser systems used for corrective eye surgery was thought to have unlimited potential. In middle January through late February 1999 the stock began a consolidation phase just below $35 before posting a breakout to $40 at the beginning of March on five times average daily volume. That event sent the stock into a trending phase that lasted through early April. During this phase the stock rallied better than 75-percent as investors began to embrace the idea that laser eye surgery was going to be a multi-billion dollar industry.

The next consolidation phase began with the April highs and lasted through early June. During this period the stock remained in a relatively tight trading range and volume slowed considerably. In the absence of further fundamental news both supply and demand for shares was in relative equilibrium. In early June Visx Inc. reported record earnings and revenue growth and once again the stock surged to a new high, this time pushing through $70 on almost ten times average daily volume. The new trending phase saw the stock appreciate a further fifty-percent to $105 in less than two months.

During each of these four phases the share price of Visx Inc moved in distinct, if not predictable patterns.

Your stock's price is sinking fast and you don't know why? Technical analysts believe that price anticipates important fundamental changes and we have just the example to prove that thesis correct.

why technical analysis price anticipates fundamental changes