Charting Emotions

If technical analysis is about greed, fear and everything in between, then mutual funds and swimmers belong in charted territory.
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this past weekend, I charted two mutual funds,

Fidelity

(FMAGX) - Get Report

Magellan and

Legg Mason

(LMVTX) - Get Report

Value Trust. Applying standard technical analysis, I then came to some definite conclusions. The matter's always open to debate, of course, but in general, most would agree my assessments were at least reasonable.

However, the bigger question -- and one that many folks asked -- is whether I should have been charting mutual funds in the first place. In essence, can technical analysis be used against a fund's net asset value? Or, perhaps,

should

it be used?

That question is worth examining, as it gets to the most basic of questions: Is charting (my "camp" of TA) a valid technique?

Obviously, I think the answer is yes, and here's why: When I chart a stock, I am essentially tracking and monitoring human behavior. In short, I am taking a snapshot of greed and fear, and all the human emotions in between.

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And if you believe that emotions drive a stock's price in the short term, then charting is really the only way to get a handle on a stock's short-term movement.

As an example, let's look at a chart of

Network Peripherals

(NPIX)

in terms of what emotions I'm seeing, rather than in pure TA terms.

So that's my theory, and if it sounds reasonable, you can see the next logical step and how it could help your trading. If you had been looking at Network Peripherals over a period of few weeks, you'd almost have to conclude that if there was a breakout over $20, accompanied by high volume, then something regarding investors' psychology about the company had changed. And if we conclude the psychology about Network Peripherals was now distinctly positive, we might then assume psychology would

stay

positive and we'd buy the stock, hoping to sell it for an even higher price later.

But that's an individual stock. Does the same thinking and rationale apply to mutual funds? Well, yes and no. The "yes" part applies to the price movement. The average mutual fund is no more than a collection of stocks -- an index of technology equities or health-care stocks or whatever the fund's focus happens to be.

And, therefore, a fund's net asset value is determined by the collective psychology of the people holding those stocks. And that psychology -- the greed, fear, etc. -- is no different than in the Network Peripherals example.

The missing element, or the "no" part, is the volume. So we don't know the depth of commitment to any price change.

Still, we can see some psychology at play in charting a fund's NAV, and it's really no different than charting the

S&P

or

Nasdaq

indices. It's not as pure as charting an individual stock and the critical volume element is missing, but I suppose we can stretch it a bit and make a case that charting can be applied to mutual funds.

That leads us to the final frontier: Can charting and TA be applied to

any

combination of x- and y-coordinates?

I think the answer is a qualified yes. That is,

if

the degree of movement along the y-axis is bound by some sort of support and/or resistance, and that support or resistance is determined by human behavior.

As an example, let's look at

Diana's

50-yard breaststroke times.

The support and resistance along the vertical, or y-axis, is determined by her physical and mental conditioning. (The x-axis is time, just like a stock chart.)

Resistance at a certain level is met, and her times "back and fill" until she is capable of moving to the next level. She then "consolidates" those gains until she is ready to swim faster. It was almost predictable that, when she broke below 39 seconds, 39 seconds would then become overhead resistance. (In essence, it's unlikely she'll now swim slower than 39 seconds.) And, so far, that's been true. So, while I'd like her to swim faster and faster every race, I'm certain she'll need to swim between 37 and 38.5 a few times before she is ready to break into the 36s.

Now, is this a stretch? I mean, seriously -- plotting my daughter's times on a bar chart?! Yeah, it looks kind of wild and almost nutty, but remember, all I'm doing is looking at support and resistance levels that are set by physical, mental or emotional barriers. In short, a graph of human behavior. Take out the physical part, and it's really not much different than analyzing a chart of

Microsoft

(MSFT) - Get Report

.

Anyway, that's my take on charting and TA and why I believe in it. It's not infallible, of course, but I'm confident it gives me a distinct edge.

Of course, if you disagree, that's certainly your call. But it can't hurt to think about it, can it?

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Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@attglobal.net.