Saturday, November 24, 2012

The Foundation of Technical Analysis

Simply stated, Dorsey, Wright focuses on the “price” of a security, because it is the ultimate determinant of supply and demand in the marketplace. When you cut through all the red tape on Wall Street, what moves stock (and thus ETF) prices is supply and demand. It is nothing more than ECONOMICS 101. We know why tomatoes in the winter don’t taste very good, don’t have a very long shelf life, and are expensive. The same forces that move prices in the supermarket move the stock market. When it’s all said and done, if there are more buyers than sellers willing to sell, the price will move higher. If there are more sellers than buyers willing to buy, the price will move lower. Therefore, recording the price action of a security can yield important information as to who is winning the battle for that security — supply or demand.

Source: Tom Dorsey about Dorsey, Wright & Associates


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