Scouring the horizon for the next wave
By Ellen Kelleher
Financial Times
Published: March 7 2008 17:30 | Last updated: March 7 2008 17:30
³Itıs not as if we are reading tea leaves in a cup,² says Robin Griffiths,
hedge fund manager of Cazenove Capital. ³Any pattern that may or may not
appear in the share price of a company has a reason thatıs driving it.²
Griffiths is a ³chartist², a technical analyst skilled in determining how
past trends can be used to predict when bull markets end and bear markets
begin. And the abilities of chartists are in demand these days as
investors
look for clues as to how long the current downturn will last. ³Thatıs the
$64,000 question,² laughs Steve Hochberg, chief market analyst at Elliott
Wave International, the US technical analysis firm.
At a basic level, technical analysis is a study in the behaviour of share
prices. It looks for historical patterns in price charts, in an attempt to
determine future performance. Right now, views are mixed on when the bear
market will end.
Griffiths believes economic cycles give a probability that bull markets
will
last about three years and bear phases will average nine months or, in
rare
cases, longer.
Hochberg predicts that markets may not resume an upward march for another
12
years. His pessimistic view is that the worldıs financial system has been
in
a prolonged downtrend since 2000. As downtrends tend to last 20 years,
this
is not likely to reach a conclusion in the short term, he says.
³Itıs tough for people to grasp the concept of these long cyclical
trends,²
claims Hochberg. ³But while many argue that we can snap out of recession
if
the Federal Reserve or the European Central Bank intervenes, it wonıt
happen. We have to play out the bear market.²
Arguably, this Elliott Wave theory is one of the most popular among
chartists. Devised by accountant Ralph Elliott in 1938, it looks for bull
markets to unfold in a five-wave structure: two types of waves are
³motive²
and propel prices in the direction of the larger trend, and three types
are
³corrective² and effect partial retracements of the motive waves.
Chartists can build a checklist of danger signals to help decide whether
the
inevitable pullbacks within the trend pose a larger threat.
Private investors looking to incor****ate technical analysis into their own
decisions might want to consider weighing stock and fund selections
against
a 200-day ³moving average². This chart indicator represents the average
performance of an investment over 200 days. So, if a share price or an
index
falls below its average price over 200 days, it is underperforming, a
common
sell signal.
³Once an investment slows down to rising only in line with the index, you
know the money could be better off somewhere else,² explains Griffiths.
Another technical indicator widely used by traders is the Relative
Strength
Index, which helps *****s whether a stock or index has been overbought or
oversold.
The RSI formula takes the average gain made on the days the market rose
and
compares it with the average loss made on the days the market fell,
usually
over a 14-day period.
But technical analysis is still largely the domain of quantitative hedge
funds, such as AQRıs Global Risk Premium fund, Black Mesa Fund, IKOS
Equity
Hedge Fund and Whitebox Intermarket Fund all of which re****ted returns
higher than 10 per cent last year.
Even so, charting and quantitative analysis does have considerable
influence
on the stockpicking efforts of a number of prominent retail fund managers.
³I would say technical analysis is good for timing the purchases and sales
of stocks,² says Robin Evans, an investment strategist with Fox-Pitt
Kelton
in London. ³I would always look at a chart before buying and selling a
stock. For short-term traders, technical analysis is extremely useful.²
Anthony Bolton, the former manager of Fidelity UK Special Situations fund,
is said to have used technical analysis to confirm investment decisions.
Les Jones, manager of Old Mutualıs Japanese Select Fund, now uses daily
trading volumes as a key indicator of whether to buy or sell.
³What technical analysis gives you is timely directional calls,² says
Grifftihs.
http://www.ft.com/cms/s/0/0110dffc-ec56-11dc-86be-0000779fd2ac.html
|
