I have been a Morningstar advocate since 1999 and I couldn't agree more.  The Morningstar approach has worked very well for me. 

 But I have been having heated discussions with my friend, who uses "Spread Trade" charts involving the 200 day moving average, MACD, and candlesticks to find buy/sell points.  What do you think of this?  I don't agree with it but can't really tell him why.

It sounds like you know Morningstar's take on the issue, so I won't belabor it more here.

However, for me personally, I would never use chart techniques to trade stocks. (I did it exactly once in my life, mostly as an experiment, and I'd rather forget that episode altogether!)

Anyhow, I guess it all comes down to your view of stocks. I personally believe that stocks represent shares of underlying businesses, and the whole point of buying them is if the market is not really discounting how the business will perform correctly. Charts pretty much never give me the information I need. However, if you view stocks as nothing more than trading vehicles, then perhaps chart reading is the correct way to go.

A more nuanced interpretation of the chart reading would point out that how a stock trades is indicative of market psychology and market knowledge. (for example, if you see accumulation of stock in a certain pattern, perhaps knowledgeable insiders are buying the thing up in anticipation of good business performance?). But the bottom line, I feel, is that charts are just too chaotic and complicated. Often, given a certain pattern, there are a number of differing and conflicting interpretations. How do you separate them out, and which interpretation is the correct one? I've never been able to tell beforehand. 

Then again, maybe that's why I work at Morningstar and not at some quant shop!

Coral99,

The sad thing is that trading off of charts does work, but it is very mechanical. And if a chart is your main basis for trading then your business is managing your trades, not owning a business. I used to work professionaly as a techincal analyst and can say there are people who are very successful. In fact, MA trading systems as simple as they are still hold to be the most profitable to use. That said there are limitations. Some already mentioned by the morningstar analyst. 1) they work well in upward or downward markets, when the market is going sideways you will get a ton of bad trading signals. 2) You are forced to almost daily review the charts of your holding and it becomes a full time job. I find it much easier myself to dedicate my time to truly understanding a business and not let the charts interfere with my decisions. I still do like to use charts as a means of guaging the markets sentiment. So if a stock is in a well defined downtrend I do not put off a decision to buy.. I simply reaffirm my need for patience. Additionally, it can be a short-cut to investing in good long term buys. I personally still screen charts for stocks in well defined down trends as part of a bottom digging strategy. Catching falling knives is not necessarily a horrible practice if one is well versed enough to know the differnce between the possibly for recovery and a death stroke.

BGF