Technical analysis : Head and shoulders and current affairs

This chart shows the Dow Jones Index March 2007 to July 2008. This is the time where the market peaked during its bull run and was on the decline. A pattern in the technical analysis is noticeable in there. As you can see mid-July 2007 and mid-December 2007 was the shoulders to the head. And somewhere in the middle of October it was the head. This pattern in technical analysis indicates that the market is going to drop and it did so.

However, I am bought by value investing and do not believe that past patterns are a projection of future prices, hence we should all just notice the pattern and take it in as part of a more wholesome analysis when investing.

In the current affairs today, there are mixed views of whether there would be a double dip in the economy as a whole. Some analyst like Richard Koo, who worked in the New York Federal Reserves during the time when Japan was trying to fix its budget deficit in the 1980s, states that the world governments are doing the exact mistakes done by Japan during that time. And others like J.P. Morgan's U.S. chief equities strategist states that there is only a one in three chance of another recession and even if it happens it would be for a short duration.

I believe that the recession would happen as there is still a lot of disagreements between some of the power houses, the way the market has bounced so much so quickly, some fatal mistakes like bailing big banks while letting others like the automotive industry fail and some other factors.

Analysis

Analysis in finance can be divided into 2 : technical analysis and fundamental analysis.

Technical analysis is the process of forecasting the direction of prices of a financial instrument through the study of past market data. Most of the time, this process would involve a graph containing huge amount of data.

Fundamental analysis is the process of analyzing financial statements and the major aspects of the business, such as its management team, to forecast the price. This uses historical as well as present data. It would definitely be more in-depth as compared to technical analysis.

Both methods has its pros and cons. The industry players also uses both methods with success.

For the average person, my advice would be to learn both up and put it to practice with a small amount of funds, which you are willing to lose, to ensure you find the method that would work for you. For those who are not capable of using any capital then you should play with some free accounts online using both methods and building your strategy.