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Picked up this and thought it is one of the best
commentaries regarding the 'balanced' use of TA with FA.
| 10:40, Fri 19 Oct
2001 |
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Charting: when a
picture is worth a thousand words
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Investment skills picked up in the
rough and tumble of the marketplace count for a lot, but studying charts
can give investors the edge, writes Bernice Cohen.
Over the past
few months most investors could be forgiven for feeling rather punch drunk
by the heightened volatility that has resulted from the continuous
onslaught of dire news. Is this a sensible time to buy? Should we be
selling, or just standing aside until the outlook seems clearer?
Fundamental analysis is an excellent tool for examining company health and
fitness but it doesn't offer much guidance on answering these difficult
buy and sell issues.
While I am convinced that investors should
study the fundamental features of the companies they plan to buy shares
in, a lot of useful information is buried in the charts of share prices
and in the benchmark indices for large exchanges, like the UK's FTSE 100
and the US Dow Jones Industrial Average. However, like so many other
aspects of investment strategy, investors either loathe or love technical
analysis, which covers the regular use of various technical factors
occurring in the market, including the use of charts.
At present,
numerous commentators are perplexed by what they see as a prolonged period
of overvaluation in the US markets. This has raised a predicament for
followers of the efficient market hypothesis, which claims that no one can
make super profits in the markets except by the laws of averages, because
speculators always appear to arbitrage away price anomalies whenever they
occur. If the US economy is indeed overvalued, it seems strange that
hyperactive hedge fund investors have not emerged in force to pull it down
to more realistic levels.
I have always thought the efficient
market hypothesis ignores the powerful influences of human behaviour
which, to put it mildly, can be highly irrational at times. And nowhere is
irrational behaviour more evident than in stock markets. Benjamin Graham,
widely reputed to be the father of fundamental analysis, said the market
was a 'manic depressive', excessive euphoria one day was followed by deep
depression the next.
Technical analysis with its full array of
market indicators is precisely designed to study this aspect of the
market's performance. It covers a range of different indicators that
examine the collective psychology of investors when they act en masse, to
assess what is going on now and what conclusions, if any can be drawn from
their mass behaviour.
Yet a substantial army of sceptics consider
charts and technical indicators as mumbo-jumbo. This may surprise you, but
I regard their antagonism as tremendously good news. It means they are
perfectly happy to disregard this entire area of market analysis. In fact,
their animosity is doubly good news because irrational market behaviour is
so ubiquitous. To ignore it in total by discrediting the tools of
technical analysis that are specifically designed to study the mass
behaviour of market participants, simply makes successful investing even
tougher than it already is.
However, for those of us willing to
examine the technical indicators, the fewer people there are who stay
alert to the complex movements markets make, the better the prospects for
large gains, because one fact is crystal clear: the majority of investors
are always wrong. Stay with the minority if you want to be with the
winning strategy.
Technical analysis will never replace detailed
fundamental examination of either any one market or a specific company but
that is not its role. What is does reveal is a series of subtle clues
about what is going on. The more each clue enforces other clues, the more
reliable the insight. We ignore these at our peril. But I'm not keen to
try to convince the sceptics, as I think investors should decide these
important issues individually. However, investors who follow the charts
plus some of the simpler technical indicators are likely to gain a deeper
insight than those who ignore these useful signals entirely.
©2001
citywire.co.uk |
D.
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