In the mid-1980s I was managing a relatively large portfolio in the Pacific Basin ex Japan, one dwarfed by the Kuwaiti Investment Office, but not really anyone else. On the other hand, prospects for me to work on bigger markets were close to zero. One day I got a call from a much smaller, relatively obscure, firm looking for someone to turn around a train wreck of a global fund. I took the job.

My predecessor had left drawers full of antacid medication …and very little in the way of files on the fund’s holdings. Lots of charts, though.

It seems that his overriding investing idea was to buy companies whose stock had recently experienced an enormous collapse, based on reading the stock price chart. The files, which contained pretty much nothing but the charts, revealed what I think was the heart of his demise.

Brokers realized very quickly what he was looking for. So they fiddled with the X- and Y-axis of the charts he wanted–stretching out the Y and contracting the X–so that just about any company showed a massive stock price drop, followed by sideways movement. This motivated him to buy all sorts of junk.

I think this is an essential truth about charts: in a world where the SE or its foreign equivalent mandates that relevant data be disclosed and where audited financials are required, chart reading is at best a secondary skill. And you should at least have a minimum of awareness about how the charts are constructed.

(An aside: things ended up well for my train-wreck fund: one of the 30 or so dud stocks accidentally went up a lot on a legal change in Spain; I got to haggle with Li Ka shing in offloading another; a third, which would normally have taken years to unload, ended up as a key block in a weird foreign bank takeover… And the fund was small enough that mid-cap stocks in Hong Kong and Tokyo could make a big positive difference.)

There are two charting indicators that I think have merit, though:

–odd-lot short sales, which are a fabulous contrary indicator, and

–support and resistance, which are basically levels where there’s been lots of buying in the past (support) as well as levels where there’s been significant selling (resistance).

This has a bearing on IT stocks in today’s market. They’ve had massive selling over the past weeks. But just as trees don’t grow to the sky, they also don’t sink below ground level.

My guess is that what we’re seeing today is IT stocks, chip and other component stocks in particular, hitting support.