Fundamentalist look for long term value of a stock. They try to understand the business, try to predict the future cash flows, risk in the firm and try to value the firm. As Warren Buffet preaches “Don’t buy a stock, Buy a business”. Buffet never invests in a business which he doesn’t understand. But definitely there are draw backs associated with this approach. Predicting the cash flow and risk of a firm may be easy to propagate in theory. But they are the most difficult things. Who would have predicted the collapse of the financial system. All the fundamental analysts were predicting that markets has the potential to go up to 30000 as the P/E was not so high either(when the markets were at 21000). But after the fall, the markets came down to 8000. Did anything change fundamentally? Even if one goes on to say that the turnaround will happen in the next couple of years, then the valuation(according to the future cash flows) should not be affected by more than 10-15%. But why does a market fall by 60-70%. Nevertheless “In a market fall, most of the time valuations also fail you. But at least you understand your current situation and avoids panic selling by the investors (who stick on to the fundamentalist view). Fundamentalists strongly believe that “Markets are efficient”. When stocks are mispriced, investor will cash in on the opportunity.

Technical analysts on the other hand, believe in charts and patterns. They never believe that “Markets are efficient”. They predict the movement of the stock prices based on the past movements. There are a lot of indicators, theories which aid the analyst. For example Dow Theory which is one of the age old pattern formation theory is a handy tool for technical analysts to identify a reversal pattern happening in a stock. Technical analysts don’t get into the depth of understanding the business. They don’t try to differentiate company based on their name or product, or their financial ratios. All they are bothered about are the curves which move up and down. They also take hints from some of the other factors like mutual fund ratio(whether MF’s are holding or selling stocks), some of the momentum indicators and the likes.
Technical and Fundamental view of the market are totally contrasting opinions. Both have their own strength and weaknesses and definitely neither is comprehensive.