Many individuals invest with their heart – it’s only natural. For most investors, their investment accounts are their nest eggs. Years of blood, sweat and tears – counted up and reflected in a single account value. We are elated when the balance rises and devastated when it falls. Investing is emotional – the very act of “being invested” elicits emotions. However, listening to your heart when it comes to investing may not be the best thing for your financial plan.
One way to take the emotions out of investing is to use technical analysis. Technical analysis is the study of using past price movements on a stock or index to predict future price movements. There is no emotion in price and therefore, there should be no emotion in technical analysis. In other words, to take the emotion out of investing – follow your CHART instead of your heart.
Let’s walk through a recent example*:
Here is a chart of the Invesco QQQ Trust (symbol $QQQ) – this Exchange Traded Fund tracks the NASDAQ 100 Index. Technology as a sector makes up a large portion** of the S&P 500 index so this chart is very meaningful to global investors. This chart starts in November of 2016 and ends on June 15th 2018. As you can see, this index was in a nice “uptrend” meaning higher “highs” and lower “lows”. This uptrend accelerated into January of 2018. When the market corrected in February, the QQQ’s stayed above their 200 day moving average (up-trending purple line)*** which is considered “support” for the index. Staying above “support” is a bullish signal – breaking below support is a bearish signal.
After making new all-time highs in March, the index corrected again, but remained above the 200 day moving average again. The low made in April was higher than the February low – another bullish sign. As of June 14th 2018, the QQQ’s made new all-time highs again – breaking through the “resistance” (flat purple line) created by the old high set in January. Looking at the bigger picture, it seems like this index had a four month “consolidation” within the context of a broader uptrend. It was a scary consolidation, but consolidations can be healthy for trends.
Technical analysis is not an exact science. It uses historical data to develop an opinion of where a security might be headed. But if we start a war with Russia tomorrow, then I would guess a lot of “bullish” charts will turn “bearish” pretty quick. Technicals are not the only thing that matters when it comes to investing. However, they are a great way to take the pulse of a stock or index WITHOUT letting emotions get in the way. Removing emotions from investing may help your decision making process.
Charles Brown is a Portfolio Manager and Financial Advisor at M. Brown and Associates in Naperville, Illinois
*This is a daily chart starting in November 2017. The lower bars indicate share volume traded on that particular day. The letter “D” indicates that a dividend was paid out on this particular security.
** About 23% according to Morningstar.com – http://portfolios.morningstar.com/fund/summary?t=SPY®ion=usa&culture=en_US
*** A moving average is an average price of the last “n” amount of trading days plotted on a chart. In this case, the 200 day moving average is the average price of $QQQ for the last 200 trading days. Popular moving averages for stocks are 50, 100 and 200 days. Although you could use any number you choose.
***The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.
****Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates and Ausdal Financial Partners are independently owned and operated