How Chart Analysis Tops Fundamental Analysis

I've been writing for Real Money for the past 15 years, and I'm known for my charting analysis. If I had to choose between basing my trading decisions on a stock's price patterns or a company's fundamentals, I'd choose charts. Hands down. I have seen many a cheap stock with solid fundamentals trade like a bobsled team racing for the gold medal. Only after you are able to get over your disbelief that your great investment is now trading at a fraction of your cost basis do you realize that the best days are behind the company. And because the best days are in the rear-view mirror, lower prices can be seen through the windshield. Even if the company is still growing, traders may be looking for even more growth. So despite an attractive fundamental picture, the chart looks ugly. By spending time analyzing the charts, you will be able to keep from getting hurt too badly by deteriorating fundamentals. Happily, we really don't have to choose between fundamental analysis and price analysis. Incidentally, I hate the term technical analysis, because I don't find looking at pictures of crowd behavior to be particularly technical. I find it to be commonsensical, which is a rare commodity in a financial world awash with useless data. If you want to find stocks that will pay you more than the S&P 500, focus on fundamentals that matter. Forget about price-to-earnings ratio. Cheap stocks are cheap for a reason. If anything, focus on stocks with very high P/E ratios, because at least you know that traders are finding the company so attractive that they are paying a premium for the stock. Make a watch list of stocks that shows consistent earnings growth -- 20% to 30% at a minimum. But more importantly, look at the quarterly earnings and focus on the stocks where the growth rate is actually accelerating. It's fine to have consistent growth. But you want to look at the rate of growth. Is the rate of growth picking up? Is it staying the same? Or is it slowing down? Look for increasing numbers rather than consistent numbers. Once you have that list, then focus on the charts. Find the best charts on that watch list and you've got a good chance of buying some winners. This daily chart of Momo shows a stock that's been in a basing pattern below $17 for quite a while. Only after the stock broke out of that range did trading volume really pick up. The stock quickly pushed above $25 and is now consolidating in a narrowing pennant formation. If you're interested in buying, I'd suggest waiting until the stock breaks out. If it does, you'll have time to buy the stock and then ride it higher until it starts consolidating again. Edwards Life Sciences is the gift that keeps on giving. The stock has been trending higher for a long time and has only tested the 200-day moving average once this year. I've indicated the last couple of consolidation patterns, though you can find several more during the stock's advance along this chart. I think you can buy now and keep a stop below the 50-day moving average. Lumentum Holdings has only been publicly traded for a bit more than a year, but the stock has run from a low of $15 to the current high of $41.79. This is the type of stock that can be tough to hold because of the steep runup. Each day, you feel guilty about making more money, and you also are fearful that the stock is going to reverse. Don't be that guy. Instead, why not try a 10-day exponential moving average (EMA) as a reference for entry points and for stop placement? If LITE starts closing below the 10-day EMA, then take some profits. But as long as it remains in between this fast-moving average and the upper Bollinger Band, then just stay long. I've featured Fabrinet recently -- when it gave the last low-risk buy point at around $40. The stock is up about 10% since then, and I think it's going higher. But first, it might go lower. The stock is at prior resistance now and really needs to close above that level. I think FN is due for a rest, but would buy any pullbacks to the 50-day moving average. Even a pullback to the 20-day moving average would probably work. By the way, I'll be teaching a free trading workshop in webinar format tomorrow. If you are interested in attending, visit StockMarketMentor.com and register. Be careful out there.

How Chart Analysis Tops Fundamental Analysis

Forget about P/E ratios; 'cheap' stocks are cheap for a reason.

Columnist Conversation

Webinar Time After the Close Thursday

Twitter Spaces at 2pm ET

Wednesday Morning Fibocall for 9/22/2021

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.