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| Can Simple Fund Chart Tell You Performance of a Fund? |
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A lot of fund investors use simple fund chart to gauge performance of a fund. As long as the fund price is going up, they are happy. However sometimes the simple fund chart can be misleading. Let me use a chart of NASDAQ index as an illustration. Below is the NASDAQ chart from December 2005 to March 2006.
Chart #1 Simple NASDAQ chart from December 2005 to March 2006
To the naked eyes, NASDAQ is doing fine in the beginning of March 2006 after going down for the past few months.
Now include RSI and MACD indicator into the same chart.
Chart #2 Technical NASDAQ chart from December 2005 to March 2006
It is clear from the technical chart, NASDAQ was going up in beginning of March 2006 with lower RSI. This indicates negative divergence which caution is required. It may be a surprise to those who use simple chart, NASDAQ lost more than 10% in the next few months.
Chart #3 Simple NASDAQ chart from December 2005 to August 2006
After losing more than 10% of it's value, will you buy NASDAQ in August 2006? To the naked eyes, it seems too risky. However if you look at techical chart of NASDAQ from December 2005 to August 2006, price of NASADQ was going down in June and July 2006, but not RSI.
Chart #4 Technical NASDAQ chart from December 2005 to August 2006
So what happened to NASDAQ? In the next few months after August 2006, NASDAQ takes out old high.
Chart #5 Simple NASDAQ chart from December 2005 to December 2006
If you were to buy NASDAQ in the beginning of March 2006 and held it till December 2006, your gain was 6%((2450-2300)/2300). However you were to buy NASDAQ in the beginning of Auguest 2006 and held it till December 2006, your gain was 16%((2450-2100)/2100).
Please be reminded technical analysis is not sure way to predict the future price of a fund. However if used correctly, technical analysis can be used to improve timing. For more information about technical analysis, refer to resources on technical analysis
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