The price movements of stocks are the result of complex interdependencies due to a vast number of influencing factors – such as fundamental and psychological factors – are expressed in the expectations and the behavior of the stock market
participants. To cope with this complexity and to derive an applicable asset strategy, analysts distinguish particularly between two dominant analysis methods in practice – the Fundamental and the Technical Analysis – which have recently been supplemented by the approach of Behavioral Finance.
With reference to a strict interpretation of the theoretical assumptions of the Fundamental as well as the Technical Analysis these two concepts are mutually exclusive. As a result of this there are a vast number of analysts who either acknowledge the Fundamental Analysis while denying the Technical Analysis and vice versa. The Fundamentals criticize that the technical approach has a lack in academic foundation and is, therefore similar to a kind of reading tea leaves, whereas the
Technicals are convinced that the Fundamental Analysis is not able to generate an advantage by analyzing the fundamental value drivers of a stock, because those are already reflected by the current market prices. In practice the Fundamental Analysis seems to have its weaknesses particularly during extreme market phases – e.g. during the New Economy bubble at the end of
the nineties – in which the psychology of the market participants gains in impact. At the same time the fundamental aspects are seemingly neglected. Furthermore, the fundamental approach seems to have improvement capabilities particularly in terms of timing.
Psychological aspects of the market participants are at least indirectly included within the Technical Analysis, which could be particularly used for timing decisions as well. Nevertheless, it has its weaknesses too, e.g. it does not provide clearly defined interpretation rules for its various numbers of chart patterns
and technical indicators. Behavioral Finance seems to have its existence authority in practice as well, due to decisions in stock markets made by human beings, who do not always behave total
rationally. All these aspects lead to the master question if the two alternative analysis methods – Technical Analysis and Behavioral Finance – can deliver any useable supplements towards the Fundamental Analysis in terms of their practical
application?
Table of Contents
1. Introduction
1.1. Basic conditions
1.2. Problems
1.3. Objective
1.4. Procedure
2. Analysis methods
2.1. Fundamental Analysis
2.2. Alternative analysis methods
2.2.1. Technical Analysis
2.2.1.1. Premises of Technical Analysis
2.2.1.2. Distinction between Chart Analysis and Technical Indicators
2.2.1.2.1. Chart Analysis
2.2.1.2.1.1. Techniques of chart representation
2.2.1.2.1.2. Trend analysis
2.2.1.2.1.2.1. Support and Resistance
2.2.1.2.1.2.2. Trend lines and Trend Channels
2.2.1.2.1.2.3. Continuation patterns
2.2.1.2.1.2.4. Reversal patterns
2.2.1.2.2. Technical Indicators
2.2.1.2.2.1. Trend-following Indicators
2.2.1.2.2.2. Oscillators
2.2.2. Behavioral Finance
2.2.2.1. Premises of Behavioral Finance
2.2.2.2. Distinction between Behavioral Finance and Sentiment Analysis
2.2.2.2.1. Individual psychological aspects
2.2.2.2.1.1. Motives and needs of market participants
2.2.2.2.1.2. Behavior of market participants
2.2.2.2.1.2.1. Rationality failures during information apperception
2.2.2.2.1.2.1.1. Simplification of circumstances
2.2.2.2.1.2.1.2. Selective apperception
2.2.2.2.1.2.1.3. Relative Evaluation
2.2.2.2.1.2.2. Rationality failures concerning the behavior
2.2.2.2.1.2.2.1. Heuristics
2.2.2.2.1.2.2.2. Herding
2.2.2.2.2. Sentiment Analysis
2.2.2.2.2.1. Premises of Sentiment Analysis
2.2.2.2.2.2. Sentiment indicators based on market data
2.2.2.2.2.3 Sentiment indicators based on public opinion polls
3. Synthesis capabilities
3.1. Proposal of a synthesis concept
3.2. Synthesis concept applied to BASF AG
4. Conclusion
Objective and Research Focus
This case study aims to examine the practical application of Technical Analysis and Behavioral Finance within the German stock market. The primary research question investigates whether these two alternative analysis concepts can effectively supplement the Fundamental Approach, which is often limited in its timing capabilities, to create a robust synthesis concept for investment strategies.
- Comparison of Fundamental, Technical, and Behavioral Finance analysis methods.
- Evaluation of psychological factors and rationality failures in market participants.
- Practical demonstration of timing indicators using German equity examples (DAX, SDAX, TecDAX).
- Development of a synthesis investment strategy to limit downside risk and optimize trade entry.
Excerpt from the book
2.2.1.2.1.2.1. Support and Resistance
Price movements of stocks are characterized by a series of peaks and troughs which lead to the concept of support and resistance.
In general “the troughs, or reaction lows, are called support” (Murphy 1999). The support level on a chart lies under the current market price and is allocated where demand exceeds supply at a special price level (Cesar 1996). This results in a halt of the decline and prices turn back up again.
According to this, the peaks, or reaction highs, are called resistance (Murphy 1999). The resistance level on a chart lies above the current market price and is allocated where supply exceeds demand (Cesar 1996). As a result, the increase is to be halted and the prices turn down again.
In the following the practical aspects of support and resistance are illustrated by the example of BASF AG in figure 2 (chart was created by the authors in MetaStocks 9.1).
So far support is defined as a previous low and resistance as a previous high, but however, this is not always the case.
“Whenever a support or resistance level is penetrated by a significant amount, they reverse their roles and become the opposite” (Murphy 1999).
Summary of Chapters
1. Introduction: Outlines the goal of comparing fundamental, technical, and behavioral analysis to improve stock market return predictions and strategy timing.
2. Analysis methods: Provides an in-depth exploration of technical chart patterns, indicators, and the psychological foundations of behavioral finance, including sentiment analysis.
3. Synthesis capabilities: Proposes and demonstrates an integrated investment strategy that combines fundamental valuation with technical and behavioral timing signals using BASF AG as a case study.
4. Conclusion: Confirms that while theoretically distinct, these methods complement each other, with fundamental analysis providing risk limitation and alternative methods offering timing optimization.
Keywords
Fundamental Analysis, Technical Analysis, Behavioral Finance, Stock Market, Intrinsic Value, Chart Patterns, Sentiment Analysis, Market Psychology, Heuristics, Herding, Trading Strategy, DAX, Investment Timing, Rationality Failures, Risk Limitation
Frequently Asked Questions
What is the core purpose of this study?
The study investigates how Technical Analysis and Behavioral Finance can be utilized alongside the traditional Fundamental Analysis to improve investment performance and timing on the German stock market.
Which analysis methods are primarily compared?
The paper focuses on three main methodologies: Fundamental Analysis, Technical Analysis (including chart patterns and statistical indicators), and Behavioral Finance.
What is the primary goal of the proposed synthesis concept?
The goal is to combine the risk-limiting strengths of Fundamental Analysis with the timing accuracy of Technical and Behavioral Finance to outperform market averages.
How is the practical application demonstrated?
The author uses five distinct practical examples from the German market (DAX, BASF, Daimler Chrysler, Vivacon, and Versatel) to illustrate how these analytical methods function in real-world scenarios.
What specific topics are covered in the main section of the book?
The main body details chart representation techniques, trend analysis, specific reversal/continuation patterns, and behavioral anomalies like herding, anchoring heuristics, and information selective perception.
What are the key characteristics of the discussed analysis methods?
The work highlights Fundamental Analysis as an approach based on intrinsic company value, whereas Technical Analysis focuses on market price behavior and Behavioral Finance addresses the psychological drivers of investors.
How does the book address the role of market psychology?
It explains market psychology through concepts like "bounded rationality," fear and greed, and cognitive dissonance, showing how these lead to systematic errors rather than random market noise.
What role do "round numbers" play in the author’s technical analysis?
The author argues that round numbers (e.g., 50, 75, 100) often serve as pivotal psychological support or resistance levels where investors cluster their decisions.
How is the synthesis concept applied to BASF AG?
The author evaluates BASF AG using a month-by-month fundamental intrinsic value benchmark, cross-referenced with specific buy/sell signals generated by chart trends, MACD/RSI indicators, and investor sentiment polls.
What is the primary conclusion regarding the incompatibility of these methods?
Although these methods are theoretically contradictory—as some assume market efficiency while others rely on irrationality—the author concludes that they successfully supplement each other in practical portfolio management.
- Citation du texte
- Timo Schlichting (Auteur), 2008, Alternative Analysis Methods Applied to the German Stock Market, Munich, GRIN Verlag, https://www.grin.com/document/132297
