Need a bit of theory explained

[IIAce]

The Efficient Market Hypothesis (EMH) says that the market reacts so fast to new news and the prices react so quickly that no investor will have an advantage over the others. Therefore, no investor will have an advantage in trying to pick stocks since everything will be priced "right". Somehow, this contradicts technical analysis.

The problem is, a pre-requisite for technical analysis is that everything be reflected in the price charts (EMH). http://www.metaquotes.net/techanalysis/

How can EMH contradict technical analysis and at the same time be a necessary axiom for technical analysis?

[IIAce]

If like you say, technical analysts believe everything (including expectations) is reflected in the current stock price then how do YOU have an edge over others? If you see a pattern, everyone else also sees the pattern. If everything is truly reflected in the stock price then no one would be able to make money, right?

[Matt Moss]

The thing is everyone has the same information but not everyone has the same interpretation of that information or the same expectations. The market can never be truely 100% efficient because it is controlled by irrational creatues (humans).

[Dee-eight]

If you don't mind a newbie's take on it, here's my two bits:

This is pretty much what Matt Moss said, only with more words...

EMH should be grounded in analysis of information, like balance sheets, income statements, P/E, historical data, etc. However, expectations resulting from different interpretations of the data are what create market swings. I envision EMH sort of like a Bollinger Band, with the (approximate) line of proper analysis corresponding with the center, and the range of expectations making up the area between upper and lower bands.

Do take my thoughts with a large grain of salt. Experienced folks, if I'm out of my depth here, please feel free to toss me a life preserver!

[gijoe9]

The Efficient Market Hypothesis (EMH) says that the market reacts so fast to new news and the prices react so quickly that no investor will have an advantage over the others. Therefore, no investor will have an advantage in trying to pick stocks since everything will be priced "right". Somehow, this contradicts technical analysis.

The problem is nothing is perfect. Some times but not often "everybody" is wrong in their interpretation of the information that is available. The story about the rain and the soybeans is the perfect example of this. It rains in Chicago and it effects the price adversly.
My point is simply this if you take the time to think things through after doing the research you may be able to identify certain opportunities for profit.