{Q} Some investors say that technical analysis should be used only as an initial screening technique. You’re saying that you can use the chart as a decision-making mechanism?

{A} I firmly believe so. Many studies have shown that a stock’s performance is 80 percent based on the group. If that’s true—or let’s say it’s just 60 percent—then you’re still suggesting that the evidence is high enough that it increases the probability for success. Again, I look at history: All of the evidence shows that relative-strength highs, trends, and reversals work over long periods of time. Over the long term, human psychology hasn’t changed. Fundamentals themselves don’t necessarily drive stocks higher. It’s money coming into the stock that drives it higher.

{Q} How do exchange traded funds affect technical analysis?

{A} My favorite topic. Exchange traded funds [or ETFs] are one of my biggest concerns. I see ETFs as a form of derivative. We used to get sector moves at a time like this. But now you have many more funds using derivatives to play the market, moving in and out of ETFs and other derivative products, creating much more intraday volatility in the market. The large flows of funds from these products are also exacerbating upside and downside price movement.

{Q} Does that make it more difficult to do technical analysis?

{A} It does make you more aware of the internal aspects of the market than in the past. Take last year, for example. Overall, the market had very low volatility, but if you looked at the sector movements, you saw a lot of volatility. In January last year, energy was up 15 percent and in February it was down 15 percent.

{Q} How are you positioning your portfolio relative to those concerns?

{A} I think we are in a market where you have to pick individual stocks and do a bottom-up approach rather than top down. You have to recognize that sometimes you don’t want to overweight or underweight any particular sector of the market, such as consumer stocks or industrials, and instead maintain a weighting that reflects the overall market.

{Q} What ideas are you more inclined to look at?

{A} I think that right now the strengths are those things that hedge against inflation: [for example], the commodity arena in terms of oil. Natural gas has been firming up, but I see some long-term structural issues there. I think the [oil] refiners look great and gold has not broken its long-term up trend. Every time they sell gold in a market event, it keeps putting in higher lows. And to me as a technician, that is bullish. 

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Sidebar

What’s an ETF?

An ETF, or exchange traded fund, is a fund that tracks an index or a market sector, such as biotech stocks, and can be traded like a stock on a stock exchange. ETFs can be owned outright or sold short. Unlike a mutual fund, which can be traded only once a day, an ETF can be traded throughout the day; thus, their value fluctuates throughout the day. Unlike most actively managed mutual funds, ETFs are not actively managed. ETFs do not carry sales loads or require a minimum purchase.