Technical Analysis: how to use a 'cup and handle' to buy funds …

Technical analysis is the study of price charts used by investors to determine when to buy and sell investments.

Technical analysis has a long history of application to shares in companies.

But, as Stephen Sutherland, co-founder of ISACO, an investment adviser in Manchester, explains in this video interview, technical analysis can also be applied to funds.

Gavin: Hello, at Citywire we spend a lot of time looking at the best funds run by the best fund managers but we don’t always look at when to buy and when to sell a fund.

With me today is Stephen Sutherland, co-founder of an investment adviser in Manchester called ISACO and he is also the author of a new book called ‘How to make money in ISAs and Sipps’.

Stephen, thanks very much for joining us. I really enjoyed the book, particularly the chapters on how to use charts and technical analysis on when to buy and sell funds. Now I’ve come across a bit of technical analysis in my time but it’s always been in reference to shares. I was really interested to see it being applied to funds.

Now you’re going to tell us about one particular signal, chart pattern, that you can see and how it can apply to some funds. Take it away.

Stephen: One of the things I wanted to show you today was a very specific bullish pattern that often occurs before a fund is about to take off on a big run.

Gavin: Which is a good time to buy obviously.

Stephen: Yes.

Gavin: I think we have a chart for this. What’s it called?

Stephen: it’s called the ‘cup with handle’ and it’s one of the easiest patterns to spot. On a chart it resembles a tea cup as seen from a side view. And the key bit is to look at the fund’s price breaking out of the pattern which, in our opinion, is the best time to buy.

Gavin: I see, so it’s spiked up on the left hand side, then it’s drifted sideways a little bit – that’s the cup – and then before, it’s creating a base isn’t it? But before it rises on again there is a little bit of a correction, a little bit of a dip, and it’s that dip that you’re using to buy?

Stephen: Yes that’s it. We’re waiting for it to emerge out of the base and break out into a new price high. So we could look at three examples?

Gavin: Let’s do that. The first fund we’ve got is a well-known fund, Old Mutual UK Mid Cap run by Richard Watts, who’s actually got a Citywire triple A rating so we know the fund well. What’s this chart showing us?

Stephen: It’s showing first of all a strong uptrend that started in late 2008 until mid 2011, that’s where the uptrend ended. Then we see the cup with handle pattern and the optimal buy point for this fund occurred in the third quarter of 2012.

So now we can, if you like, look at the second one: the Neptune US Opportunities.

Gavin: Also a well-known fund. So what happened here?

Stephen: Look for the strong uptrend for the first three months of 2013.

Gavin: That’s the first half of the chart.

Stephen: Yes, then the cup-with-handle pattern and the buy point occurring in early May 2013.

Gavin: Now the cup is a bit less obvious to see there so you’ve obviously got to do a bit of interpretation.

Stephen: Yes, one of the things you can do, there’s lots of good books on technical analysis but one book that I do recommend that people take a look at is ‘How to make money in stocks’ by William O’Neil. That’s got lots of examples of this cup-with-handle pattern.

Gavin: Right, good tip, thanks for that. And our last example: Invesco Perpetual Global Smaller Companies.

Stephen: Yes again you see the strong uptrend. This pattern always starts with a strong uptrend then you get the consolidation which …

Gavin: It would have been good to have been invested in that uptrend, that beginning bit wouldn’t it?

Stephen: If you would have been in there, that’s the time we would have been watching the fund to first of all pick it up on the radar.

Gavin: I see. You’re identifying funds you like and then you’re waiting for the right conditions, the right pattern to emerge?

Stephen: Exactly, so these cup-with-handle patterns, the actual cup shape is formed usually when the market is going into a correction. And we’re watching it carefully, waiting to see if it can prove itself by building the right side of its base.

Gavin: Well that gets you into the fund. We’ve not got time to talk about what signals to look for when to sell but it’s all in your book, so I do recommend people going having a look at it. In the meantime Stephen thanks very much for taking us through the cup with handle.

Stephen: You are very welcome, thank you.

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Technical Analysis: how to use a 'cup and handle' to buy funds …

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