Now Try Telling Me That Charts Don't Work

By: Clive Maund | Sat, Nov 13, 2010
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You still sometimes read articles by critics disparaging charting or Technical Analysis as it is more formally known. Sometimes the criticism emanates from fundamental analysts who have maybe tried it and baulked at the time and effort required to master it, and in ignorance take to deriding it. Usually the attacks go along the lines that "the past is no guide to the future" and "stocks move by random walk" etc - one guy wrote to me and told me that "fundamentals will always trump technicals". As late as the 1980's in London a leading investment magazine described charting as "voodoo in the markets". I worked as a Technical Analyst in London in the 1980's which is where I "cut my teeth" in this business, but using books and information I personally got from the States (with the honorable exception of the UK Society of Technical Analysts), which was light years ahead of Britain in this field - I did not learn Technical Analysis from the pompous buffoons who were still at large in London at that time - you could take these guys out in the street and beat them with a carpet beater and clouds of dust would fly off them, that's how stuffy some of them were.

The claim that "the past is no guide to the future" is arrant nonsense, as any good historian will attest, which is why the study of history is not only fascinating but very useful indeed. Everything we do in the present and stretching out into the future is already predetermined and conditioned by what has taken place in the past - you only have to look at the intractable debt mess to see that. Therefore any person armed with an understanding of the past has a much greater ability to predict future events, and this is as true in the world of stock investing as in anything else. Stocks DO NOT move by random walk - very seldom do big moves or major uptrends "come out of nowhere".

Unlike some fundamental analysts the writer do not see any inherent conflict or competition between fundamental and technical analysis. There are two key points to grasp - one is that for fundamental information to have any value you have to be in possession of actionable information ahead of the crowd, and in this respect the ideal situation is to be an insider. For example if you know in advance that a company is about to surprise the market with awful results or a massive share issue, you dump any stock you hold ahead of the announcement and, if you can get any with it, short it. While this may obviously not be legal, insiders can get round this fact by using proxies. The other is that generally speaking charting is a vastly more efficient way of screening out the best possible stock investments than fundamental analysis, as with the latter you may have to pore over details for hours before you realize that a stock may be a poor investment, whereas an experienced chartist can "dump the trash" in a matter of seconds. Successful investing is an opportunity cost game, which is why the seasoned chartist will answer the polite enquiry "How are you?" with the retort "Compared to what?"

The fact that the price is the latest information you have about a stock, because the price is the summation of all buying and selling pressure, gives the experienced chartist an edge over the vast majority of fundamental analysts, because it is possible to grasp the significance of a price pattern or a sudden price move without knowing the fundamental reason or reasons for it. In an age where banks of supercomputers battle with other other to front run and fleece the ordinary retail investor and disinformation, manipulation and meddling are rife, and where the most powerful and priveleged traders and institutions operate by a different set of rules, or receive "slap on the wrist" fines if caught out, this is a real advantage. Even with the best of intelligence, however, the battle to come out on top in the markets is never easy. Charting or Technical Analysis does not therefore provide any guarantee of success in individual cases. It is a probability game which we use to stack the odds in our favor. We aim to be right more often than we are wrong and to employ damage limitation in those cases where the market moves against us.

In the end "the proof of the pudding is in the eating". Judge for yourself the efficacy of applied charting from the examples of stocks traded on clivemaund.com in recent months that are set out below. While this list is obviously a "cherry pick" of the best results from our recent forays into the market, there are also many stocks not listed which have gone up by more modest but still worthwhile percentages, plus a few "duds" which didn't work out, one example being Golden Star which we dumped like a hot potato last week when it suddenly plunged on poor production news, getting out almost even.

Abraxas Petroleum AXAS $4.17, recommended on May 26th at $2.39

Abraxas 6-Month Chart


Aquila Resources AQA.TSX C$0.88 ($0.846), recommended on August 9th at C$0.345 ($0.338)

Aquila 6-Month Chart


Avino Silver & Gold ASM.V C$1.80 ($1.77) recommended on 8th September at C$0.87 ($0.84)

Avino 6-Month Chart


Cream Minerals CMA.V, CRMXF C$0.155 ($0.16), recommended on 26th October at C$0.13 ($0.13). Although we are thus far showing only a modest profit in Cream, this is a potent situation as at least two suitors are interested in the company, namely Endeavour Silver and Minco Silver, and with a bit of luck they will slug it out like the buyers of that Chinese vase in London last week, which sold for a record 50 million pounds - better hope nobody drops it.

Cream Minerals 6-Month Chart

In the stockmarket intrinsic value is often a meaningless fundamental abstraction. In the final analysis stocks are valued at what people are prepared to pay for them, which in the case of that Chinese vase that sold in London last week for about 50 million pounds was rather a lot...

Chinese Vase


ECU Silver ECU.TSX, ECUXF C$1.19 ($1.16)recommended on 29th August at C$0.66 ($0.63)

ECU Silver 6-Month Chart


Golden Tag Resources GOG.V, GTAGF C$0.66 ($0.6287) recommended on 19th September at C$0.28 ($0.27)

Golden Tag 6-Month Chart


Running Fox RUN.V C$0.15 recommended on 11th October at C$0.11 ($0.105)

Running Fox 6-Month Chart


Samex Mining SXG.V, SMXMF $0.67 ($0.669) recommended on 27th August at C$0.305 ($0.29)

Samex Mining 6-Month Chart


Southern Arc SA.V $1.68, recommended on 10th June at C$0.80

Southern Arc 6-Month Chart


We end with a sobering example of damage limitation. After everything looked fine Golden Star Resources GSS GSC.TSX, $4.49, C$4.53, recommended on 23rd September at $4.96, C$5.13 suddenly cratered last Tuesday on news from the company about "production problems". Since nobody in their right mind wants to invest in a company lamed by such problems, it follows that much lower prices probably lie ahead for this stock, particularly if the sector goes into retreat. Even without knowing the reason for it the experienced chartist seeing this sudden violent decline in this mid-cap stock would know it means trouble. We therefore ditched it the next morning on a short-lived feeble bounce, getting out about even. This sort of failure happens from time to time, and if you know how to handle it you can take it in your stride.

Golden Star 6-Month Chart


A question uppermost in the minds of investors in the Precious Metals sector this weekend is whether the sharp drop on Friday is a sign that an intermediate top is in and that a severe correction may be imminent. We plan to address this issue on the site before the weekend is out, with a special emphasis on appropriate tactics.

 


 

Clive Maund

Author: Clive Maund

Clive Maund,
CliveMaund.com

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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