Why technical analysis?
Technical analysis centers on the belief that we can look at past price data in order to determine a security’s potential for future growth. We believe that focusing on price helps us cut through the endless amounts of market data to eliminate emotion from our investment process and focus on the fundamental relationship of supply and demand. Ultimately, if there are more buyers than sellers, demand will push a security’s price higher, and if there are more sellers than buyers, excess supply will create downward pressure on the security’s price, pushing it lower.
How does technical analysis fit in my process if I use fundamental analysis?
While we certainly understand that fundamental analysis has its purpose in portfolio construction, fundamentally strong securities can and do experience periods of underperformance. By incorporating technical analysis into your investment process, you can pair a fundamental process for determining “what to buy” with technical insights on “when to buy.” In this sense, technical analysis can help you manage risk by identifying potential entry and exit points on a security's chart.
What is Point & Figure charting?
Simply put, Point & Figure charting is a method of recording security price data in a logical, organized way. No security has ever gone up in a straight line. Instead, there is a great deal of day-to-day volatility in the price of a security that does not tell us anything meaningful about the overall strength of a security. All it is is statistical noise.
Point & Figure charting gives us a tool for filtering out that random noise to smooth out the chart and focus only on significant changes in a security’s price. Point & Figure allows us to focus on the overall direction of a security’s price movement, and creates clear and objective patterns that act as the signals at the center of our rules-based investment process.
How does Point & Figure work?
What’s unique about Point & Figure charting is that time is not a factor. Rather than each column corresponding to a particular period of time, we simply alternate columns of Xs and Os, with Xs indicating a security’s price is rising and Os indicating a security’s price is falling. As far as we’re concerned, when a particular movement occurred is far less important than what that movement tells us about the direction in which the security is headed.
As we alternate columns, the tops and bottoms of these columns will form near term levels of support and resistance. Breaks through these levels of support/resistance form the patterns that inform our decision making by allowing us to create a rules-based investment process. These patterns create clear and actionable signals that allow us to objectively and unemotionally react to the market as it changes.
What is Relative Strength?
Relative Strength, which is also known as momentum, is based on the belief that winning securities will continue to outperform. In essence, Relative Strength provides us with a framework for identifying leadership, positioning our portfolio to invest in those leaders for as long as they remain strong, and adjusting when new leadership emerges.
Why Relative Strength?
The answer to why we use Relative Strength is actually pretty simple- It has been shown the ability to produce returns above the return of the market over long periods. Importantly, numerous academic and financial studies have shown that the momentum phenomenon exists both across different markets and asset classes as well as within individual markets and asset classes, allowing you to benefit from incorporating Relative Strength throughout your investment process, from developing an asset allocation to selecting the securities that fill out that allocation.
Ultimately, Relative Strength is simple in concept, yet powerful in application. Since Relative strength is simply the comparison of price performance within a universe of securities, it is not difficult to develop a rules-based system for investing in high Relative Strength securities. However, since research has shown it to be applicable across a variety of markets and security types, it is a very valuable portfolio management tool.