You might have noticed that the OTC Journal focuses mostly on the fundamental corporate developments companies disclose. We use the fundamental progress of the companies to try to identify our upside potential.
Nevertheless, in each edition we include a chart with some technical comments on the current prospects for movement either up or down. You might ask yourself why charts are important if our focus is primarily fundamental and long term.
Trading action is highly influenced by the roughly 9000 hedge funds that are now in existence. That is a lot of fund managers chasing a few stocks in play. Cconsider that there are only 5000 stocks of meaningful size, and only about 2000 of those with sufficient liquidity to handle large order flow. Roughly 10% of hedge funds close down every year. The hedge fund business is a tough, and it’s certainly not getting any easier with all that competition for any kind of outperformance.
Most of these hedge funds are trading with some version of technical analysis. There are a much smaller number of hedge funds trading in the microcap environment, but they do tend to dominate the action and exacerbate the price movements.
With 9000 hedge funds and thousands of actively traded mutual funds out there, this is now truly the ‘Era of the Chart.’ The Buy and Hold strategy still works over the long term for many investors. However, if you want to actively manage your portfolio you must pay some attention to charts and develop your own style. Personally, I like trend lines and support/resistance analysis. However, I only use technical analysis in situations where you have strong fundamental growth. A mixture of the two should yield you your best result.