Bear Market Helps Chartists Draw Believers : Wall Street: These technicians use graphs to predict a stock’s direction. Their method is gaining credibility.
With the financial markets becoming a more slippery playground, market technicians--also known as chartists--expect that the world’s nervous portfolio managers will not dismiss their methods as quickly as they once would have.
Unlike analysts who base their judgment on “fundamentals,” or facts about economies and companies, technicians plot charts that measure a security’s momentum, price history and other factors to predict its direction.
“I can’t count the number of times I’ve said what’s going to happen but not why,” said Bronwen Wood of London-based Quilter Goodison Co. at an international technicians’ conference held last week in Montebello, Quebec.
Although many market players dismiss chart predictions that come without explanations, Wood says technical analysis yields results. “It’s a great way to make money,” she said.
More important, technical analysis can point out pitfalls for portfolio managers groping for profits in foreign markets, where their intuition might fail them. “It’s hard to get an instinctive feel for markets other than one’s own,” Wood said.
For instance, British and U.S. portfolio managers in Japan have been consistently outperformed by Japanese fund managers in their home market.
“If they had looked at the charts, they need not have performed nearly as badly,” Wood said.
This failure to watch the charts, a disadvantage during the bull market of the 1980s, could be downright dangerous in the current bear market, technicians say.
“Some (markets) will have pneumonia, and others will have the sniffles, and it’s important to know the difference between the two,” Wood said.
Japan’s Nikkei index has plunged about 40% from its peak, while the Dow Jones industrial index has dropped nearly 20% since setting an all-time high just under 3,000 points in mid-July.
Technical analysts agree with their fundamentalist cousins that most world markets are due for a fourth-quarter rally but then will resume their longer-term decline.
As Francis Schutte of the Belgian firm Wisselagent put it, “We’ll have the champagne first and the hangover later.”
His charts show that Japanese stocks could rise 25% before year-end, the Dow may flirt with its record of 2,999.75 and the Dow transportation index could rally 30%, particularly if Persian Gulf tensions ease.
But when 1991 comes, the Dow could fall below 2,000, erasing years of gains, say many technicians.
At the three-day conference, sponsored by the International Federation of Technical Analysts, the chartists displayed graphs--mostly showing down trends--that also predicted falls in commodities, gold and the U.S. dollar.
Such dire forecasts spell trouble for the technical analysts themselves, who were treated at the conference to an impromptu talk on coping with sudden job loss.
