As an unequivocal believer in the virtues of the fundamental stock analysis influenced by the teachings of Benjamin Graham and Warren Buffett, it is a bit odd for me to comment on technical analysis. Although I do believe that technical analysis can work under the right strategy executed by the right people with the right emotional temperament (my friends over at Tudor Investment Corp being the most obvious example), I have always been a fundamental investor in search of determining the fabled “intrinsic value”. The underlying principals of technical analysis seem too blunt in my opinion, everything in this world has some level of inherent value based on the utility it provides and a properly trained investor willing to do the necessary analysis should be able to determine this value within a range and trade accordingly.
Regardless of my theoretical beliefs, many market participants use technical analysis to drive their investment decisions. These collective actions result in real tangible changes in asset values and as such need to be understood even by fundamental investors. A fundamental investor need not agree with the reason why a stock is moving but it behooves him or her to understand why a stock is moving. Just as a hitter in baseball does need to know how to throw a curve ball but he does need to be able to recognize a curve ball and anticipate the ball’s movement.
Many quantitative investment strategies are based on some sort of trend following - very simply put they buy an uptrend and sell a downtrend. The “trend” is typically determined by a moving average. For the sake of this analysis I will be dealing with simple moving averages as opposed to exponential moving averages due to the fact that I was not prepared to spend my whole weekend creating the necessary calculations in
