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Many chartists claim to have called the bottom of the market and are now forecasting strong gains ahead. But can investors really make money from their pronouncements, or is it just hindsight masquerading as insight? Robert Tyerman reports

In a week or two's time, one of the City's most esoteric, but on occasion its most influential, group of soothsayers will be put out of its misery. Chartists, or technical analysts as most prefer to be called, are waiting for the latest Thompson-Extel rankings to be published, showing who is judged the most useful by institutional investors.

Among the fancied candidates is American-based investment giant Morgan Stanley's Robert Ruddlestone, a technical analyst whose prestige and commission-generation are such that he is given an office big enough to play boule (French bowls). Other contenders include broker Teather & Greenwood's Richard Crossley, who claims to have called the top of the dotcom bull market and warned of Wall Street's imminent fall before September 11, and such formidable veterans as Richard Lake of stockbroker Brewin Dolphin and HSBC's Robin Griffiths.

On balance, each has a reasonably cheering message for investors. Crossley told his clients in mid-March that levels of 3,000 to 3,200 in the FTSE 100 Share Index would 'represent the nadir of the bear market which began almost exactly three years ago'.

With the index now standing at over 4,000, he has not changed his view. Lake, who spent ten years at UBS before joining Brewins, sees a move to 4,500 in the Footsie 'over the next few months'.

He warns that several larger companies' shares, including Reuters, Granada, Chelsfield and Lastminute.com are looking 'overbought' relative to the rest of the market, on a short-term view. But that does not alter his essentially bullish view of the market as a whole.

Griffiths at HSBC has been bullish for some time after predicting bottoms for Wall Street last October and European markets in March. However, he sees these movements as 'part of a reverse head and shoulder pattern' and expects markets to peak in May next year, by when investors should 'go back out of equities and into bonds'.

Griffiths says cycles are such a pervasive feature of life that the spring and autumn equinoxes have 'an astonishing relationship with markets': hence, the old 'sell in May and go away' tag. He notes that the 'yield gap' between the Footsie and gilts (the amount by which equity yields exceed those on Government securities) has lately been wider than at any time since the 1960s, when 'cult of the equity' was only beginning.

Within that, he sees signs of strength in Punch Taverns, Smith & Nephew, Cattles, MMo2 and Close Brothers. His potential weaklings include Easyjet, Logica, 3i Group, ICI and Lonmin.

Not all chartists agree. Hemscott's Bill Adlard is more bearish, recently arguing that 3,800 on the Footsie or 'considerably lower' was an 'immediate target'.

The question for investors is how much attention to pay to their views at all. During raging bull markets or periods of sharp commodity price fluctuations, chartists tend to hit the headlines, but at other times their voice is more muted.

Chartists are analysts who plot the direction of markets, shares, commodities and currencies by reference to their past patterns of movement, literally their charts. Chartists may relate what the chart is doing to 'fundamental' considerations, such as company profits, economic trends and political developments — but only as afterthoughts, to show, if possible, how faithful a mirror correctly-analysed charts hold to the real world.

Thus, chartists monitor the trends in markets, calculating the moving averages of different prices and identifying 'support' levels, from which, on repeated past form, falling prices are likely to bounce, and 'resistance' levels, through which past experience suggests they will find it hard to rise. They plot one price against another or several others and note the points where one crosses over another, marking what has happened after similar crossovers.

Thus, in the long term, chartists tend to believe in cycles repeating themselves and become distinctly excited when they do not. In the short term, they belong more to the 'momentum' school than fundamentally-oriented factions, such as 'value' investors.

The skill of the chartists lies in spotting and highlighting new chart points of significance soon enough to enable clients to make money. Some, such as broker Charles Stanley's David Simpson, use technical analysis for short-term, minute-by-minute trading, while others read the technical runes for long term investment decisions.

Peter Webb of the Unicorn Asset Management group, who runs the Eaglet investment trust, says 'technical analysis is useful to the extent that one can use it to compare the performance of shares in one sector with those in others over a long time scale. They reflect economic trends, but be careful about using them for short-term movements: they are not for traders'.

Webb differs sharply in this from Richard Feigen, a leading light at stockbroker Seymour Pierce. He argues that chartism is 'a flawed technique', being based on past movements.

'Charts are not a driving force for investors,' Feigen maintains, 'but they can be for traders and private clients. They are more for short-term trading.'

Laurie Beevers at broker WH Ireland says charts can be useful, though they do not play the role they once did. (As a floater of Aussie mining companies in London, he says some charts have the gold price rising from around $370 an ounce to $430).

At Teather & Greenwood, Crossley insists that technical analysts have come into their own again, especially those who called the major market movements correctly and in time. For example, he suggests his own work makes him a significant contributor to Teather's profits.

He recalls how in January 2000 he noted that the then high-flying Marconi was showing 'significant relative and absolute downside' potential. That was because its price had begun to experience falls in high trading volume.

Crossley continued his warnings about Marconi and fellow star Vodafone, even provoking Marconi's boss George (Lord) Simpson to complain to Teather. This was at a time when fundamental analysts were still enthusing about both.

'Vodafone and Marconi had tested new highs in absolute terms, but they were telling a different story relative to the index. There, they were breaking down at lower levels and losing momentum'.

Later, Crossley drew attention to the Woolwich financial group because it was rising on high volume. Three days later, a takeover bid arrived.

'Volume is the key,' says Crossley, who argues his chart signals are telling clients what 'the clever investors are doing'. This is a technical exercise, but, he suspects, one which reflects a fundamental truth: that, however strongly enforced the rules against insider dealing, if a company calls in advisers over a deal, there will be leaks.

'The only recent case I can think of where there was no volume build-up ahead of a bid', recalls Crossley, 'was the Morrison bid for Safeway, where Morrison did not call in City advisers to begin with but had a session with his old mates in private.'

He recalls using the volume argument to warn about Wall Street very soon before the September 11 terrorist attack on New York. Crossley subsequently put out a note entitled 'Conspiracy Theory', questioning why such a volume of smart selling preceded the outrage, and was telephoned by the US Embassy for his pains.

Having called what he regards as the market's turn in March, he and his rivals in the small community of technical analysis do not believe the writing is on the wall.