Technical Analysis

Technical analysis is primarily the study of patterns in the stock market. Most so called professionals don't put much credence in the practice preferring fundamental analysis - looking at things like money supply, cash flow, earnings, P/E ratios and the like. I believe that ultimately, the market is all about psychology and herd mentality. Technical analysis is a tool that allows one to measure desperation and conversely manic exhilaration in the market. It allows for the discovery of pending psychological barriers based on past history. For example, since there are so many traders and investors in the market, the law of large numbers, allows us to make some generalized predictions about how much of a loss people are willing to take before panic selling takes place.

Look at the weekly chart for the Dow from 2002 to present. The red horizontal lines indicate the bottom and the top of the market during that period and starting from the top 1/3 loss, 1/2 loss and 2/3 loss. Look at the point I circled, that is where 50% of the gain was lost by an investor who put their money in at the bottom in 2002. Once the market pierced that level, it fell like a rock. This is not a coincidence. It doesn't always happen so dramatically, but it happens enough to bet on.