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Listen to an interview with Fred Meissner, CMT (December 22, 2009):

At The Fred Report, we consider ourselves to be strategists whose primary input is Technical Analysis. While we do look at fundamentals, our focus is on forecasting market action, and relating that forecast to a view of the investment landscape that makes sense.

Technical Analysis is the analysis of the behavior of investors, while fundamental analysis studies the behavior of corporations. Another way to look at this is that Technical Analysis studies the supply and demand for stock, while Fundamental Analysis studies the management and business of companies. Both types of analysis attempt to predict equity risks and returns. On a Macroeconomic level, Technical Analysis studies investor's belief about the economy and business conditions, while Fundamental Analysis studies economic reports, statistics and the like.

One belief we hold is that the behavior of investors can be analyzed to discern leading indications of events, or equity values. Through Technical Analysis we can study the "footprints" of investors and traders using a wide variety of investment methodologies, and divide these into two groups: the "smart money", and other investors. We believe this is why there are so many instances where technical trends have changed from up to down, and visa-versa, prior to fundamental news being readily available. We follow the money, and believe the "smart money" acts in advance of news.

We use Technical Analysis in many ways, but the most important are the following. First, we use it to manage risk. All things being equal, an investment becomes more valuable as the price declines. How many times have we seen the reason for the price decline appear at the END, rather than the beginning of the decline? Second, we look to the technicals to confirm an anticipated fundamental change. We want the market to share our point of view. As part of this we note that fundamental opinions that are not confirmed by technical action, can be early. Last, a long-term price chart can put current measures of value into historic perspective more readily than columns of figures or ratios.

To help codify our analysis we have divided the panoply of technical indicators into three areas that we call the Three Market Principles. These are Psychological, Internal Momentum, and External Momentum. We informally group these into what we call condition indicators, and timing indicators. The first Principle, Psychological, deals with measures of investor sentiment, and contrary opinion. Examples of these indicators include put/call ratios, and sentiment surveys. The Second Principle mostly deals with breadth indicators and such. While these indicators often lead price they can be the hardest to interpret. The Third Principle consists of various price indicators, and these indicators are commonly in the public view.

We thank you for subscribing to the FRED Report and welcome your questions and comments.  The "E" in FRED stands for Education, and we hope to educate you along with helping you invest successfully.

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