The Hindu Business Line : Why is technical analysis so popular?

Let's face it: Technical analysts are gaining in popularity. Why so? Because technical analysis has `shown its usefulness through the bull and bear markets.' Secondly, it explains how the two opposing forces, viz. supply and demand, `interact to provide clues to the direction of stock prices.' A more important reason you may need to accept this is that the `technical' followers `learn how to buy near price bottoms and sell near tops.'

Dejected fundamentalists may ask, "Oh, where do the rest of us go then?" Where else but to Clifford Pistolese? Because his new book Technical Analysis for the Rest of Us, from Tata McGraw-Hill (www.tatamcgrawhill.com) is about `what every investor needs to know to increase income, minimise risk, and achieve capital gains.'

And the preface assures, "With a studious attitude, you can develop an enlightened approach to the market and enjoy the rewards of investing successfully."

Basic concepts

Begin, therefore, with `basic concepts of technical analysis' using which you can distinguish `desirable, timely investments' from the rest. "It's not possible for you to know everything that affects the financial fortunes of a company. However, all that is known about a company's prospects is reflected in a stock price chart that summarises the results of all the transactions in its stock."

With simple sketches and crisp explanations, Pistolese takes you on a tour of: double and rounding tops and bottoms, up and down trends, head-and-shoulders and its inverse, ascending and descending triangles, parabolic curve and trading range, flat line formation and erratic volatility.

`A note of caution' that the author hastens to add is that technical analysis can't eliminate the inherent risks in the stock market. "Consequently, when buying the stock of any individual company, no matter how well respected, it's best to limit the amount of money you invest to a small percentage of your total assets."

If you are an investor who checks the prices of your stocks every day, but not the trading volumes, count yourself as `uninformed'. You're then ignoring a major factor affecting the prospects of the stocks, admonishes the author.

"Watching the volume of trading and making comparisons to average trading volume enables an investor to distinguish between price moves that can develop momentum and those that are just meaningless random movements."

Scores of charts pop up from the pages to arm you with line-reading skills.

"A trading range is a series of price fluctuations within a delineated vertical distance," explains Pistolese in easy style. "Each trading range has its own limits, which can be narrow, wide, or anywhere in between. The top of a trading range is a resistance level, the price at which holders of the stock are eager to sell. The bottom of a trading range is a support level, the price at which investors are eager to buy."

Move on to the chapter on `moving averages' where you'd learn how to smoothen out the fluctuations in the stock price.

"For example, a 10-day moving average is the average of prices from the 10 most recent business days."

While the `simple moving average' gives equal weight to each day's price, EMA or `exponential moving average' is more up to date because it "gives extra weight to the more recent days in the sequence."

Before you start trading, Pistolese handholds you in looking for `an uptrend that is just starting, with two or three ascending bottoms', and using a ruler `to see if bottoms can be aligned to identify an uptrend.'

Knowing how to trade an uptrend is an important aspect of trading, emphasises the author. "The best time to buy is after the stock price has risen a little way from the trendline. When to sell is a matter of judgment because there is no reliable way to predict where the short-term rises will end."

The book has instructive chapters on portfolio management, and technical analysis and the Internet, apart from inputs on the how of analysing closed-end funds. A chapter on real estate investment trusts (REITs) speaks of the avenue as "an opportunity to make investments that pay high dividends and have the potential to produce capital gains." When real estate values are on the ascent, REITs have appeal to those looking for a balance of income flow and capital gains, explains Pistolese. "REITs write leases that last for 10 years, which makes the rental income flow more reliable."

What do REITs own? Varied properties. Such as: "Health care facilities, regional malls, neighbourhood shopping centres, office buildings, apartment complexes, industrial parks, restaurant chains, self-storage facilities, amusement parks, assisted living facilities, or hotels and other types of income-producing properties... "

Must read. Because if you can't beat the technical analysts, it may make eminent sense to join them!

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