Gundlach Defends Technical Analysis

Criticism of technical analysis ranges from bemused skepticism to claims of harebrained alchemy. Few investors as well-respected as Jeffrey Gundlach admit to using it. But yesterday, he explained why he relies on technical analysis under certain conditions.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call at 4:15pm on May 22. The focus of his talk was DoubleLine’s fixed-income closed-end funds, DBL and DSL. There were no slides accompanying his presentation.

Technical analysis will work some of the time and fail some of the time, according to Gundlach. It works when the market’s resistance and support levels are “in sync” with sentiment signals, he said.

“When those things marry together,” Gundlach said, “technical analysis works 70% of the time.”

Gundlach said that he’s been investing professionally for 35 years, and has outperformed the market 75% to 80% of the time. Half of that has been due to technical analysis, and half due to fundamentals and understanding investor psychology and human nature.

Technical analysis and resistance levels were the primary topic in Gundlach’s previous webcast. He said then that if the 30-year Treasury bond breaks through the 3.22% level, it would be a stronger signal of higher rates than if the 10-year yield rises above 3%.