I think I took my first course in Principles of Investment in either 1970 or 1971. At the time, there were two dominant schools of thought. One was the “fundamental approach” founded by Benjamin Graham and popularized by Warren Buffett. It emphasized detailed analysis of the company financial statements, especially the footnotes. Critics allege it is “bottom-up,” putting too much emphasis on the arcane statements and not enough on the sector or the competition or the overall economy.
The other dominant school was the “technical approach,” whose followers are called “chartists.” Many even brag that they don’t know the name of companies they buy and sell, because their decisions are driven by the chart action alone. Critics allege it is too simplistic and ignores too much that matters. My thinking is that charts are only useful in timing decisions. Now, take a look at this chart:
The Russell 2000 is a popular index for the price performance of smaller companies. This shows that the long term trend line (green) for these stocks has broken above the resistance line (red), which is that price level where the index has bounced off before. This is important! It could mean the bulls are getting ready to run!
It is not unusual to see a stock or index pierce the resistance line briefly and then fall back below. However, when it pierces it the second time shortly afterwards, it suggests the bulls are getting ready to run — BIG TIME!
Now, if Congress would just resolve the debt ceiling and budget issues . . . quickly, please!