Forget all the sceptical talk, says Brian Tora. Technical Analysis can provide essential insights
With markets drifting back as sentiment suffers through continuing uncertainty in the Ukraine, this could be an appropriate time to look at alternative means of evaluating the likely direction of shares. Technical Analysis (TA) has long been used as a means of identifying likely trends in a variety of financial assets. Stock indices, individual shares, currencies, commodities – all have their fortunes plotted by charts, with plenty of interpretations available to try to tell you where the next move is heading.
Cometh the Moment….
As it happens, some conflicting signals have been emerging in the chart world recently. A colleague of mine recently pointed to some unsettling developments in our own FTSE 100 Share Index. Apparently, a series of higher highs, which indicate that buyers are prepared to pay more for shares, has been negated by a new series of lower lows – which points to sellers being prepared to accept progressively lower prices. The former suggests a rising market, the latter a falling one.
In the end, this conflict led him to reverse his hitherto bullish stance and predict that the Footsie could be in for a significant retracement. All this took place before the situation in Ukraine and the Crimea hotted up, leading to damaged sentiment and falling markets. His timing was spot on – but charts couldn’t really have forecast what was going to happen on the borders of Russia, could they?
But Which Technique?
The problem with TA is that there are a wide range of tools available, and sufficient different approaches to mean that a single chart is capable of several different interpretations at the same time.
Another colleague of mine is fond of using MACD – or Moving Average Convergence Divergence. I have yet to understand quite how he uses this particular set of indicators, though I understand it describes the difference between two exponential moving averages.
Then there is Fibonacci Retracement. Fibonacci sequences have been around for centuries. The basic sequence is arrived at by adding the two last numbers together to form the next in the sequence. Thus 1, 1, 2, 3, 5, 8, 13 – and so on to infinity. Fibonacci ratios and inverses (these are 61.8 and 38.2, but I haven’t a clue how they are arrived at) play an important role in determining the distance assets travel to retrace ground made or lost. And I haven’t even touched upon relative strength or stochastics yet.
I have been fortunate to know, or have met, a number of prominent technical analysts. Brian Marber, the father of prominent playwright Patrick Marber, is still actively interpreting charts well into his seventies. Investment Research is still producing technical research, though the founders have long since departed. This was an organisation I got to know well as I worked for a time out of an office close to theirs in Cambridge.
It would be wrong to leave out New York born David Fuller, who still posts technical research on the internet. When he was research director of Chart Analysis, he used what are known as point and figure charts, which I confess I found impenetrable. And there are others too numerous to mention, some of whom I worked with as many firms had TA operations to support the more fundamental research they carried out.
Personally, I view charts as a useful tool, capable of delivering a simple picture of what is going on in a market or stock. Using it as the sole reason for making an investment decision strikes me as being a little dangerous, though. But when the message delivered by the charts supports the approach an investor is considering taking, it can provide additional comfort.
Brian Tora is an associate with investment managers, JM Finn & Co