Can drawing lines on a price chart help you retire?
When many investors think of technical analysis, they picture day traders with multiple screens of complex annotation-riddled charts. That picture is just about the furthest thing from the Buffett-style long-term investing that's typically associated with retirement investing.
But should technical analysis have a place in your retirement portfolio? You bet.
First, let's talk about what technical analysis isn't.
Technical analysis isn't a magical crystal ball for stock prices -- at least, not any more than a P/E ratio or balance sheet.
Those are useful fundamental tools to be sure, but they can't predict the future. Instead, fundamental investors use their toolbox to try and identify opportunities where the odds are stacked in their favor. Technical analysis is no different.
At its core, technical analysis is about identifying the supply and demand for shares in the market. Price charts are the most common way to do that.
Just like fundamental analysis, technical analysis isn't a panacea.
But it can help to add another layer of information to your analysis that's totally uncorrelated from the fundamental tools that most people rely on.
Likewise, a growing collection of academic research has shown empirically that professional investment managers who use technical analysis actually outperform their fundamentals-only peers.
And, from a retirement perspective, that's what makes using technicals most valuable -- it's something so few retirement investors pay attention to that the ones who do can get an edge. It turns out that technicals are useful across all time frames; and some of the most successful technical investors are the ones who use technical tools for long-term positions.
That's particularly true in environments like the one we're in now, where valuations are somewhat extended and how investors feel about the market arguably has a bigger effect on market prices than fundamentals can explain.
The good news is that you don't need to be a charting wizard to gain an advantage through technical analysis -- some of the biggest benefits come from just using the very simplest of technical tools. I'm talking about trend.
For decades, it's been statistically observed that markets trend -- and by simply investing with those trends for your retirement, you can position yourself for upside while simultaneously limiting downside risk.
A perfect example of that comes from shares of General Electric Corp. (GE) .
GE has been a great example of a value trap. And with a 3.35% yield, it's not hard to imagine that retirement investors are drawn to what's now a hefty payout in a low rate environment. But, as GE has shown time and again in recent months, it's been more than capable of shedding far more than that yield in a single session.
At a glance, GE's long-term price trend has been impossible to miss.
What's more important is it's been hard to miss for quite some time now. The parabolic downtrend in shares has been a clear-cut signal that sellers are in control of the price action here. Put another way, there's an abundance of supply of shares of GE in the market right now -- and for that reason, it's best to step out of the way of the selling until that supply imbalance rights itself.
The counterexample is Apple Inc. (AAPL) .
Apple's been bouncing its way higher in a very well-defined uptrending channel for most of the last year. That's strong evidence that buyers are in control of the price action -- and it provided crucial context just last month during the broad market selloff that rattled investors. In the depths of the selling, Apple's uptrend remained intact.
Again, the trend is evident at a quick glance -- but simply investing with the trend kept you in the stock that's working and out of the one that wasn't. It's almost too simple. But human nature in the financial markets typically keeps investors from doing the things that are most simple but most effective.
What's important to note here is that Apple's uptrend doesn't actually predict anything. The chart isn't a magical crystal ball.
While it confirms that buyers are in control of Apple's price action, it doesn't guarantee what Apple will do next. Shares could easily violate their uptrend with a big selloff and reverse course. But the value here is that using this simple technical trend analysis can provide the signal that a meaningful trend change is happening so that you can react to it.
It's easy to write off technical analysis as the purview of day traders -- or worse, as completely ineffective. But the data say otherwise. Adding the most basic technical tools to your retirement toolbox can keep you on the right side of the trend -- and away from value traps -- in this market.