Embracing Technical Analysis

 | Jan 15, 2014 | 12:58 PM EST
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When people interview me about my new book, Get Rich Carefully, the part they are most surprised by is my embrace of technical analysis. They can't believe that this old fundamentalist has any use whatsoever about the charts.

I always say, "Look, I am not a chartist, but I do like to know what they are saying and I like to meld that with the fundamentals."

This week's "off the charts" segment on "Mad Money" is a great example. Take a look at Apple (AAPL). The stock took off after CEO Tim Cook's interview where he talked about how Apple is going to take China by storm because of its new deal with China Mobile. The deal encompasses much more than cellphones and is the most important geographical entry ever for Apple -- under Steve Jobs, Apple never attempted to do anything as bold as Time Cook is doing. And, believe me, it is bold because lots of people figured that the Chinese wouldn't pay Apple's inflated price point and would stick with Samsung. After all, we are not sure yet about what the subsidies will be for those who purchase the iPhone, so there is a sense of the unknown.

But I contend that chief competitor Samsung has lost its edge in everything -- including marketing where it had been so strong but has now faltered. I know most commentators disagree with this. Plus, remember, Apple no longer seems to get the benefit of the doubt no matter what it does. Just three quarters ago, the company was being heckled for not putting enough emphasis on China. So what does Tim Cook do? He makes it a top priority and yet analysts have been slow to embrace the move -- as slow as they were when Apple did such good stuff for shareholders with its buyback and its dividend.

I think the cynicism about Apple is reflected in its inability to wow the Street with new products or dazzling acquisitions. And yet  Google (GOOG) saw its stock go up almost twice as much as the $3 billion it paid for a non-chirping smoke detector and a really nice looking thermostat (its Nest acquisition). In the Street's view, it seems that Google can do little wrong while Apple can do little right.

This brings me back to what's driving the stock: technical analysis. On Monday, I had Carolyn Boroden, our own Fibonacci Queen, on "Mad Money's" "off the charts" segment. She traced out a very positive scenario for Apple, which seemed totally unexpected given the heavy decline that day in the Nasdaq and the sogginess of tech, in general, and Apple, in particular. I loved the call because it was totally contrary to the prevailing wisdom and to the recent downgrades we had been seeing and, most importantly, to the substantial short position that had been building, as there seemed to be no news flow that could save the stock.

It turns out that her call was exquisitely timed. The stock had rallied just enough that Boroden's work suggested it could be in for a major move if it just added a few points to its total.

Voila, Tim Cook, a technologist, triggered the technical buy, which then triggered the short-covering, which then triggered the magnificent rally. My point? I don't think we would have seen a move of this magnitude if the stock had not broken out technically. More importantly, you could have actually nailed the move without knowledge of the China deal if you had followed the technicals.

Even though I am a long-term believer Apple, I would never have been inclined to feature Boroden and her work that day if it didn't seem totally out of sync with that moment's trading. That entry point is incredibly important, and the Fibonacci Queen gave you an amazing one. This proved, in one fell swoop, that technical analysis not only should but must be embraced if you are going to catch major moves in stocks you want to own very much, but just can't figure out when you should pull the trigger.

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