Tuesday, March 17, 2009

Charts for Novices ...

Several non-professional investors like me have a significant amount of our networth invested in the equity markets. We also regularly see research and hear technicals being talked about. I at least am often irritated by how technical analysis always seems qualified and contingent on a certain price level for the future without a clear indication of what we should do NOW.
Through some trial and error I found that for long term investors, useful signals can be drawn from combining charts with their 200 and 100 day moving averages (easily done on Yahoo! Finance among others) and drawing signals from where the moving average lines intersect and where the chart of the underlying stock and/or index is in relation to such intersection point.
To illustrate, let's look at the Dow for the last five years:
Therefore, a purchase of the index in January 2005, when the chart of the Dow (the blue line) was above the point where the 200 and 100 day moving averages intersect and a sale in January 2008, when the Dow was below the point where the two moving averages intersect, would have made a lot of sense.

Similarly, for the BSE Sensex:
Purchasing the index in end 2004, possibly with further purchases in mid 2007 (given what we knew then we could have been excused ;-), when the index was above the point where the 200 & 100 day moving averages intersect and a sale in H1 2008 when the index was below the point where its 200 & 100 day moving averages intersect would have been profitable and importantly, reduced losses significantly.

In both cases, you would admittedly not have caught the bottoms or the tops but you would have reasonably reliable confirmation of a trend. Also suggest you look at a reasonably long term chart (2 years, 5 years even) so you don't act too soon. Also, the signal from both charts is to wait for now - it is possible that long term buying opportunities emerge in the near future but we can't yet be sure.
Good luck to all of us!

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