We think fundamental analysis is more useful than technical analysis, but we do take technical factors into consideration.

One of the problems facing technical analysts is that of time frame. By expanding or contracting the time window, opposite conclusions can be reached.

Longer time frames are better for establishing major trends, while shorter time frames are better for establishing minor trends.

When the minor trend is in the same direction as the major trend, there may be more reason to be confident of a continuation. When the minor trend is in the opposite direction of the major trend, there may be more reason to expect a reversal.

Look at these two charts for the emerging markets ETF, symbol EEM.

The short-term, six month chart shows lower highs and lower lows. That is a classic sign of a downward trend.

The long-term, five-year chart shows higher highs and higher lows. That is a classic sign of an upward trend.

If you are a long-term investor, you may be encouraged by the signals from the five-year chart. If you are a short-term investor, you may be discouraged by the signals from the short-term chart.

This is not meant to be a tutorial on technical analysis, but rather a cautionary statement about technical charts and technical comments by others that may influence you in your investment decisions.

One reason that technical analysis may work, at least sometimes, is that it can become a self fulfilling prophecy. If “everybody” expects something to happen, because “it is written in the charts”, it may very well come to pass. Eventually though, we believe that fundamentals will prevail.

The great fundamental investor Benjamin Graham made the famous statement “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

A reasonable translation of that quote might be, “In the short run the market is driven by technical factors, but in the long run it is driven by fundamental factors.”

If you are going to rely on technical signals, become reasonably familiar with the types of technical tools available, what they’re supposed to tell you, and how popular they are among current investors. Then make sure that you look at multiple time frames so as not to miss the forest for the trees. Finally, for all but short-term traders, fundamentals eventually trump the technicals.

Richard Shaw
QVM Group LLC