Ask Colin

Regarding your pick for Shares Magazine Feb 2001, page 67. The chart for Housewares International (HWI) looks decidedly a sick dog nowadays. Tech analysis is cute, but until you know the people running the show isn't it a bit academic? The real truth is that no-one really knows what is going to happen next week - though many pretend they can.

Regarding your pick for Shares Magazine Feb 2001, page 67. The chart for Housewares International (HWI) looks decidedly a sick dog nowadays. Tech analysis is cute, but until you know the people running the show isn't it a bit academic? The real truth is that no-one really knows what is going to happen next week - though many pretend they can.

A number of issues are raised in this question, to which I would like to respond.

Firstly, it is true that HWI has not turned out to be the most inspired of my recommendations in hindsight. In the article I chose to discuss HWI, but considered and dismissed SDI, which would, again in hindsight, have been the better choice.

Secondly, knowing who is running the show is important, They are in fact a proven team. However, even the best team can run into events like the failure of a major customer, which has happened in this case. By the way, that development was well flagged on the chart way before the news came out. All of this is not relevant to my column though, which is a technical analysis column. I would love to write about fundamentals too, but that is not my brief here.

Thirdly, I totally agree that nobody can predict the future. I do not use technical analysis in this way. Rather, I use it to tell me the condition of the market and devise a strategy to deal with that situation. If you read my articles and columns, you will see this is my approach.

So, what was the strategy for HWI, as outlined in the article? It was to buy near the 130-day EMA, which was then about 90 cents. The stop-loss level was at 82 cents. It is arguable whether there was a buying opportunity on this strategy because HWI came towards the EMA, but then scooted higher. Some readers may have bought at 90-91 cents, but not many. Providing they followed the strategy they should have got out at 80-82 cents for a bearable loss. Losses are an inevitable part of trading and the key to success is to keep them manageable.

In fact, there were later developments on the chart that should have signalled these readers to get out square or even at a slight profit on the failure of the double top pattern. However, one of the problems with articles like this is that we have limited ability to follow them up.

I hope this answer will help you to better understand how technical analysis can be used to drive strategy rather than the futile pastime of trying to predict the future.

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