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It is possible that examining the height, direction, and rate of change of stock prices will yield insights into strategic themes. Charting is a branch of securities analysis that seeks to derive insights about the future path of stock prices from their recent trends. Chartists presume that securities prices are driven largely by market psychology, rather than by economics. The discussion in this chapter, and throughout this book, presumes otherwise, for there is little scientific evidence that these techniques assist an investor in finding exceptional investments. But the task in this instance is to identify strategic themes of creative destruction, rather than to predict investment returns directly.

It may be possible that charting measures can reveal important themes not evident in the other approaches reviewed here. The acquisition analysts should consider classic charting measures as possible sources of themes. Indexes of “odd lot” trading show the relative presence of small-volume traders in the market—an “odd lot” trade has less than 100 shares. The belief is that odd-lotters are relatively unsophisticated traders who get sucked into purchasing shares near the end of a long run-up in prices, and into selling shares near the end of a long decline. In short, the conventional chartist point of view is that odd-lotters buy high and sell low. Some chartists follow statistics on short sales. In these transactions, the investor has sold shares that he does not own, in expectation of a stock price decline, after which the shares will be repurchased, and the position closed out at a profit. An increase in short-sale positions may indicate pessimism about a firm or industry.

Chartists follow various confidence indexes, one of the most common being the ratio of average corporate bond yields to average dividend yields. An increase in the confidence index is believed to signal optimism; a decrease, pessimism. Relative strength statistics measure the extent to which a firm’s stock price moves faster or slower than the general market. Changes in relative strength would signal optimism or pessimism. Volume of trading data gives insights into the extent of action in a firm’s shares. Sudden and material increases in trading volume may signal the arrival of new expectations about the firm. Finally, moving average analysis affords chartists a benchmark against which to assess daily price movements: a downward penetration of a moving average line suggests selling pressure; an upward penetration suggests buying pressure.