How I analyse charts in Chart Breakout

Editor Quentin Lumsden explains

Chart Breakout is a monthly publication on the stock market, which makes share recommendations based on technical analysis of past price action. There are a whole string of relevant techniques that come into play including analysis of trend lines, patterns, moving averages, trading volume and also the underlying fundamentals of the company, the sector, the overall stock market and the domestic and global economy. Charts have a crucial role to play in highlighting opportunities and confirming the significance of important fundamental developments.

One of the first things an investor learns when they start to study stock markets is that indices and individual stocks move in cycles, which can last for many months and even years. It is this characteristic behaviour that makes chart analysis valuable. We are able to alert subscribers at an early stage in a new rising trend and vice versa, when shares start to fall.

One of our most useful techniques is based on a methodology known as the Coppock indicator. This is a weighted momentum indicator that gives extraordinarily accurate buy signals for indices like the US Dow Jones Industrials and the UK FTSE All Share index and a whole raft of other national indices. In recent years these signals have become even more interesting because of a marked tendency for all global stock markets to move in step.

Coppock buy signals are given after bear markets. In order to be valid the indicator needs to become negative and then turn higher, i.e., become less negative. Some examples will help readers realise how useful these buy signals can be. There was a global bear market between 2000 and 2003. Coppock gave a buy signal for the FTSE All Share index in June 2003. The US Dow Jones index signaled even earlier in April 2003. In the bull market, which ran from early 2003 to the summer of 2007, the FTSE All Share index more than doubled and the Dow Jones rose around 100 per cent.

In the next bear market, which ran from summer 2007 to March 2009, Coppock indicators for indices across the globe again turned heavily negative. The next buy signals came in May 2009 for many indices including the FTSE All Share and in July for the Dow Jones Industrials. In the bull market, which ran from March 2009 to July 2011, the US Dow Jones rose 93 per cent and the FTSE All Share by 74 per cent offering many opportunities for capital gains from individual share investments.

By those earlier standards the recent set back has been relatively small but has still sent the Coppock indicators for many markets into negative territory. We are watching closely for new buy signals.

Coppock does not give sell signals. For those, we have to use other techniques such as pattern, trend line and moving average analysis. Using these techniques the FTSE All Share index gave sell signals in autumn 2000, in the second quarter of 2008, well ahead of the dramatic share price collapse that followed the bankruptcy of Lehman Brothers and most recently in 2011, ahead of the August intensification of the European sovereign debt crisis that has again triggered a severe setback in share prices.

The logic of this analysis is that investors should use charts to help them time their entry and exit from stock markets. Once the broad decisions to be invested or to be liquid have been taken, investors can then use charts to help materially with individual stock selection. Any investor who is unaware of what the charts are saying is running his portfolio with one hand tied behind his back.