**20/08/10 - 9.01am - by James Gerrish**
There is quite a bit of scepticism in the broader investment community about the benefits or validity of technical analysis - about investing based on underlying patterns of price and volume. I'm keen on technical analysis as an overlay for longer term investment decisions and the primary form of analysis for shorter term trading positions.
Last week, one of the most successful hedge fund managers in the US closed his firm and retired after amassing a fortune of more than $2.8 Billion personally, and averaging 30% annually since 1986. Stanley Druckenmiller owned and ran Duquesne, a New York based fund with $12 billion under management. Druckenmiller was a Macro Hedge fund manager that aimed to profit from the broad based economic themes that were playing using a combination of investment products (stocks, options, bonds etc).
In an article reported in Bloomberg recently, Druckenmiller said his success was in part due to lessons he learnt from his mentor at his first job at Pittsburgh National Bank, Speros Drelles. Drellas taught him to use technical analysis to help gauge whether prices were poised to jump, while most analysts were relying on a companies financial reports on whether to buy the stock. If the company had good charts, supporting fundamentals and fit with the current marco theme, he would ad it to his portfolio. He was very much of the opinion that price should be a large dictator of investment decisions as price would ultimately be the determinant of profit or loss when the position was wound up.
This is how we like to model our investment strategy. We decide on an overall theme that we believe will play out over the medium term 1-3 years. We look at companies that fit that theme on a fundamental basis then invest in them when price action gives us a solid foundation or probability for a favourable move.
The theme we believe will play out over the next 1-3 years is a disparity between developed and developing economies. Developing economies will support global economic growth so we look to Australian companies that are exposed to the growth in emerging markets.
Looking more broadly at the over arching technical structures that are currently playing out in the market, we need to turn to the US as its still by far the largest economy in the world.
The S&P 500 & Dow Jones Industrial Average are forming a longer term head and shoulders - which is a bearish technical pattern. This pattern may not complete however our line of thinking suggests that when these patterns are evident there is a greater level of risk to the downside. SEE CHART HERE OF THE DOW. This means that we remain confident in our overall theme in the market, however the price action of the major markets are causing some concern in the near term. This may allow us to gain exposure to this theme at lower prices in the coming weeks.
Last night, the DOW JONES lost -144 points or -1.39% to 10271. The FTSE 100 lost -91.58 points or -1.73% to 5211. Locally the SPI Futures are matching 67 points lower.
