1. Paradigm shift: From
Fundamental Analysis
to Technical Analysis
Tom Bopp
Golden Gate University
0B /12 /201,6
FI 340: Investments
With Professor Lenzi

2. Introduction
From fundamental analysis to technical analysis markets can be better explained
through the simplicity of technical analysis with innovators outside the realm of finance.
Experts in the fields of sociology, and psychology are adding credibility to technical
analysis. A few conclusions will be expanded upon to support this analysis. There has been
a major shift in the finance world away from fundamental analysis and growing popularity
in behavioral finance. We can see supporting evidence that behavioral finance yields a
positive and predictable analysis on three examples. First we can look at the global
economics, secondly we can view the mainstream media, and thirdly a brief assessment of
the financial markets. In conducting a survey from the big picture of current global
economic events we can zoom in on current mainstream media, and magnify our analysis
on the current financial markets to view the ease and simplicity that one can draw
predictable conclusions from why markets go up, down, and sideways.
Technical analysis has been gaining creditability from innovators outside the realm
of finance. Experts in the fields of sociology, and psychology are adding credibility to
technical analysis. They can diagnose why a particular security or a market may suddenly
spike or fall and can more aptly illustrate market moves with psychology, consumer
sentiment, actions off of good and bad news as well as, greed, hope and fear. Hence, we
arrive at a major shift in the finance world away from fundamental analysis and growing
popularity in behavioral finance. We could think of the large deep pocket institutional
traders as both purchasing and selling their positions in the markets. If the market is going
sideways, it may merely mean that large market makers are building a position via

3. accumulating a large line of stock at bargain prices while absorbing all of the available
supply, It is later now that strong demand by the entire market bids up the price of the
scarce supply. Further, w€ can imagine the composite operators distributing a long line of
stock on the campaign upwards, slowly releasing their supply.
In the process, the composite operator begins his campaign and slowly sells little by
little some stock to the general public allowing the crowd to thereby bid up the price. This
early process has been related towards greed, and the general public keeps speculating and
purchasing more and more of the stock in hopes that the price will continue to rise. Near
the bullish peak the composite operator has relinquished most of his position and will sell
off the rest of the security ideally at market peaks to the general public, whom of which
hope the price will keep going up. In this fashion the composite operator has made a
handsome return on his trade. All the while the late comers to the market buy as the price
now drops. They perceive these drops in prices as bargain deals. However, the general
public and the laggards are the weak hands and wer. noi aware of the large and strong
composite operators that created this bull market campaign. Now in the fear stage, a
panicky sell off commences at continuously dropping prices by the general public in the
fear stage all the way down to through the bear market bottoms. Finally, reaching
capitulation where the small ill-informed speculators take huge losses and may not return
to the markets for some time if at all.

4. I. Global Economics
Behavioral finance yields a positive and predictable analysis on three examples.
First we can look at the global economics and see principles in practice. Take for example
the most recent global economic crisis in the real estate bubble of 2007 -2008, and even a
bit further back with the tech bubble of 2000. These booms and busts are attributable to
three basic premises: greed, hope and fear. Take for instance the collateralized debt
obligations (CD0'S) where real estate mortgages were split off into tranches and
repackaged and sold in the financial markets worldwide. We can observe the innovators
who first created the CDO's whom of which were the banks that offered the mortgages to
subpar clients, the underwriters at the investment banks that in turn repackages the debt
as securities as well as the credit rating agencies. They all realized how much money they
could make. The investment banks shortly realized how toxic the CD0's were and
immediately relinquished any holdings and sold them to whomever would take the
securities off the investment banks books. After all, the investment banks had paid the
credit agencies a handsome fee for triple AAA ratings on the CDO's.
People flocked to these investments and entire countries invested heavily in CDO's
later going into bankruptcy, and many people's retirement accounts were wiped out by this
contagion effect. Further, challenges arose with a high possibility of default. Then, we can
link the underwriters at the investment banks who in turn worked with the credit rating
agencies to repackage the mortgages and pass on the risk of default to anyone who wanted
to invest. Investing started with the institutions, pension f,unds, hedge funds, and

5. governments early on, then the general public and finally the laggards. In this analysis we
see the mortgage crisis as something like an international domino effect.
II. The Mainstream Media
Secondly, we can view the mainstream media as a financial markets barometer. We
can often draw reference to magazines like The Economist, Forbes, Newsweek, and Time
Magazine. In technical analysis these simple magazine covers can be viewed by a brief walk
through your local Barnes and Noble Book Store. Back in 2000 and200B many of these
magazines served as contrarian indicators just by looking at the covers. We would have
seen some magazines with a picture of a bull on the front cover often trying to show
optimism and belief that the markets are ready to rally higher. Other magazines may have
big pictures of houses on the cover, stating that now is the time to invest, or another real
estate boom is just around the corner.
In technical analysis we know that there are large composite operators at work with
deep pockets and strong hands, also known as market makers, like large institutional
investors, pension funds, and insurance companies. These players are in control of the
markets and also generally are the owners of the mainstream media like Fox News, CNBC
Business Channel and the Wall Street Journal. They want both you and I to believe that
things are getting better and the market will go higher so that they can get every last dime
from investors of the crowd,
IIL Assessment of Financial Markets
Thirdly, we can take a brief assessment of the financial markets. In Daniel
Kahneman's book titled, "Thinking, Fast And Slow" he discusses a similar analysis from a

6. doctor's perspective. "To be a good diagnostician, a physician needs to acquire a large set of
labels for diseases, each of which binds an idea of the illness and its symptoms, possible
antecedents and causes, possible developments and consequences, and possible
interventions to cure or mitigate the illness" (p.7). |ust as the good doctor conducts his
analysis on a patient; so to the technical analyst or rather market technician requires a
prognosis and diagnosis of the financial markets.
The financial markets always seem to have a place for opportunity as we rise up and
into a growing bull market as well as sharp fall into a spiraling bear market. Take for
example the recent British exit out from the Euro currency. Financial markets globally
panicked off of the perceived bad news and went into turmoil temporarily over a few days
only to recover. The large scale investors know all too well that markets are prey to general
psychology and will take every opportunity to place their trades betting that the market
will turn south via short orders and placing long positions in times of perceived positive
events.
In technical analysis we would disregard all of the fundamental information such as
price to earnings, dividends, earnings per share, beta, return on investment and return on
equity. In technical analysis of the financial markets we would solely follow the price action
and volume on simple candle stick charts. It is well known that candle stick charts were
effectively employed to forecast rice futures in Japan for thousands of years. Further, one
could employ the use of a point and figure chart as a companion piece to get cold hard
calculated trade positions on the long side as well as going short in a particular financial

7. market and trade stocks, bonds, commodities and futures. The point and figure (Pnf) chart
is comprised of X's and O's on a grid.
Generally, if the price moves up for three consecutive days we would observe an X. If
the next day, if the price went up by at least another three points on the exchange it is listed
on we would observe another X in the same column in the next box above the previous
day's high. Likewise, in a similar fashion, for a reversal to the downside an explanation
follows. If the price declines for three consecutive days we would observe an 0 in the
adjacent column, one box below the previous day's high, hence the price reversal. Three
point's for a reversal in either direction with the Pnf is the most widely used, but five and
ten points may work better for longer time frames of a decade or more. One point reversals
are effective for analysis on a short time frame, such as one month, or even one week.
We would arrive at price projections to the upside by counting what looks like a
congestion area at market bottoms, counting from right to left O's for lows and X's for
congestion zones at market tops. Further we would multiply the count by the box reversal
of three, times the point per box of one, add it to the price at the count line thereby arriving
at the bullish price objective. Bearish price objectives would require one to subtract the
count from the price at the congestion zone. Identifying congestions zones or rather trading
ranges is something of more detailed analysis and is more of an art form.
In Dr. Hank Pruden's book, "The Three Skills of Top Trading: Behavioral Systems
Building, pattern Recognition, and Mental State Management" he discusses the major
components of technical analysis [price, volume, time, and sentiment) very succinctly.

8. Referring to exhibit A.) his adoption/diffusion life cycle model largely utilized in the fields
of social science, psychology, and marketing serves as reinforcing significance of financial
markets as a very much social and psychological phenomenon.
Crowd behavior is explained in the S-shaped curve of the life cycle model beginning
with phase I fAccumulationJ, phase II (Markup), phase III fDistribution), and finally phase
IV fMarkdown). We can also visualize price beginning from the bottom of the curves at
zero, to the top of the curves at price highs. The overlay, which you could visualize as a bell
shaped curve illustrates the market participants, "...ranging from the early smart money to
the 'odd-lotters,' those who enter the market last" (p. 5B). The bell shaped overlay proceeds
in the following fashion: Innovators/lnsiders, Early Adoptors, Early Majority, Late Majority,
and finally the Laggards/Odd-Lotters. We can also label in a time horizon fear at the
beginning of the curves, while contrary opinion sits about in the middle and towards the
end of the curves we arrive at greed.

9. Work Cited
Kahneman, Daniel. Thinking, Fast And Slow. Farrar, Straus and Giroux,2011. Print.
Pruden, Hank. The Three Skills of Top Trading: Behavioral Systems Building, Pattern
Recognition, and Mental State Management. Hoboken, NJ: John Wiley & Sons, 2007.
.Print.

10. Exhibit A.)
Appendix
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