Does Technical Analysis Make Sense for Small Cap Stocks?

by JDH on November 30, 2006

My post yesterday about my perhaps mistake on Pitchstone Exploration Limited elicited a response from DW:

You can’t win them all and it is a real challenge to use, as the primary indicator, technical analysis to play speculative stocks. Fundamental analysis of not just the sector but the company is often required. My thinking is that the technical analysis is more valid with larger companies as they would have greater analyst aka institutional interest and for these entities it takes time to accumulate positions, which often drives up prices methodically. I’m fully invested now and its time to figure out how to trade into better positions.

My response:

Interesting thoughts. I agree that fundamental analysis is important, but I don’t agree that you can’t use technical analysis on smaller companies; I think you can use it on anything (try plotting the price of gas at the pumps, or the temperature for the last hundred years).


{ 2 comments… read them below or add one }

DW November 30, 2006 at 10:39 am

To clarify, it is worthwhile creating the technical analysis of the price,
volume, MACD movement but for the smaller co’s with relative illiquidity and minor ‘institutional’ following, it seems to me that one needs more to base a buy or sell decision on.

Perhaps I’m interpreting things as ‘momentum’ trading where you may be in
and out of positions on a daily or weekly basis – here the analysis changes
to more of a gambling format and on the speculative stock short term
analysis becomes more valid.

I believe we are attempting to seek value (value investing) which means we
need to find undervalued opportunities and hold positions longer.

My other thought is that we should continue to pour money into the 4 largest uranium stocks as institutional interest is now in the sector and positions need to be accumulated, therefore prices ought to go up systematically. Unfortunately at this point the returns may not be 70% in 11 months like we have seen so far in 2006. Therefore we need to
make a conscious decision about how much $$$$ we are willing to speculate with.

Today’s position, based on Dines lists:
List 1 0%
List 2 53%
List 3 6%
List 4 8%
List 5 8%
List unauthorized 24% (9% of which is another stock and 7% Cross Hair)

JDH November 30, 2006 at 10:52 am

I don’t disagree with your comments.

My investment philosophy is NOT to day-trade; I prefer to hold for an extended period of time. Most of my current holdings I have held for over six months. However, I do believe that technicial analysis is worthwhile to determine entry and exit points.

I also agree that the big players (Pinetree, Mega, Fronteer) should be the largest holdings in our portfolios. The balance gets spread out amongst many other stocks that are more speculative, but with enough variety the risk is also spread out.