How to Apply Technical Analysis to Mutual Funds
Technical analysis of mutual funds examines price movements and price-related trends, such as sales volume. Fundamental analysis of mutual funds, on the other hand, examines the intrinsic values of the stocks in the fund. Technical analysts generally believe these fundamental values are already represented in the prices of the fund's stocks. Access to the mutual fund research pages of online brokerages makes this once-esoteric way of analyzing equities relatively easy.
Trend, or Momentum
For technical analysts, the most important aspect of a mutual fund's price history is its trend -- the fund's price history, which records investor behavior and indicates investor sentiment. To look at a mutual fund's trend, go to any online brokerage's mutual fund research page and look at the fund's price charts over various time periods. Price charts may be posted for a single day or may extend over periods of up to 10 years. For technical analysts, the most useful charts are the short-term charts covering five to 30 days.
No fund's price moves uninterruptedly upward. Every price chart shows peaks and valleys. To determine an overall trend, the analyst imposes straight lines over the price chart, connecting three or more price peaks. The more peaks connected, the more predictive the trendline becomes, revealing, for example, a steady underlying upward trend or one that moves increasingly or decreasingly upward.
Support, Resistance, Reversal and Consolidation
A horizontal price line extended forward from the last price peak often indicates resistance to further upward movement. A horizontal line extended forward from the last low point often indicates support for further upward movement. A chart may indicate that the price has broken above earlier resistance levels or that it has broken below earlier support levels. A substantial trend reversal to the downside occurs when fund's price breaks downward through the most recent support level after failing to rise above a resistance level. A reversal to the upside occurs when a fund's price breaks above a resistance level after climbing above a support level. A horizontal trendline over a series of peaks and troughs indicates price consolidation, which, for many traders, is a sell signal.
Moving Averages, Volume and Momentum
Trendlines are one way of confirming overall trends. Moving averages are another. Most online brokerages offer short-term moving-average charts for five days and 10 days. A five-day moving average chart, for example, sums daily the closing averages for the fund over the last five days and divides by 5. Some online chart sections allow you to superimpose the daily volume chart over price or trendline charts. A pattern of increasing sales volume over a rising five- or 10- day period signals a significantly strengthening fund price promising further gains. A price momentum chart calculates the daily price differences over a five- or 10-day period. Increasing positive price differences reveal upward momentum, another strong buy signal.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.