- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Technical + fundamental analysis = better buy and sell decisions
Combining fundamental with technical you can potentially enhance the timing of your buy and sell decisions, especially within a share market where volatility is the new-norm.
Technical analysis and fundamental analysis are often considered polar opposites when it comes to stock market investing.
Together, technical and fundamental analysis can provide a more complete picture of a company and what’s happening on the share market.
Start with fundamental analysis
You can’t apply an ‘investor’ mentality to stock selection if you don’t know what a company is worth. That’s where fundamental analysis comes in. By analysing historical financial data, along with forecast earnings and profit projections, you’re in a better position to predict future company performance and growth.
Remember, as a share market investor, you’re buying a piece of a company, so it’s critical that you understand the underlying business you’ve bought into. If you make no attempt to do so, then you’re treating the share market like a casino. Gambling is not investing.
By drawing on financial ratios - like return on equity and net debt to equity, plus qualitative indicators like management capability, earnings sustainability and a company’s competitive advantage - you can determine the all important intrinsic value of a company. Once you calculate a company’s value, you’re better positioned to form an opinion on its future share price.
Don’t overpay for shares
What you actually pay for a company’s shares is the most important determinant in your future returns. You can’t just buy a quality company at any old price and hope for the best. This is where technical analysis (aka charting) can help.
As a smart investor your ultimate goal is to buy quality stocks trading at a discount to their intrinsic value (IV) - the sum total of the businesses worth based on earnings, dividends, equity and debt. That’s because over the long term, share prices typically reflect the value of the underlying business.
Value investors who are patient enough will sooner or later be able to capitalise on negative announcements or unflattering macroeconomic data, which occasionally triggers a share market correction. Its called ‘buying on the dips’, and it’s not unusual for the share market to move over 200 basis points in any trading month.
Use technical analysis to time trading decisions
Negative market sentiment can drag down even the highest quality top stocks. These occurrences can represent mouth-watering buying opportunities.
Technical indicators, which focus on volume and price, try to gauge the direction in which share prices might be heading. This technique can help you time your entry into top quality stocks when they’re most likely to be cheaper.
Technical analysis won’t help you identify the best stocks to buy. It will however let you draw conclusions from trading patterns, company charts, graphs and trend lines to help you pick the best time to act on a stock.
Technical’s advantage over fundamental analysis
So what exactly can technical analysis add to your stock research that fundamental analysis can’t?
Fundamental analysis can’t tell you what the market thinks of a stock you want to buy. That’s where the ‘technical stuff’ like volume indicators can help.
Notable spikes traded volumes typically suggest that a stock has attracted abnormally high attention from the trading community and that its shares are under either an ‘accumulation or distribution’ phase. Volume indicators can help confirm whether other investors agree with your fundamental outlook on a stock. They can also help gauge whether a stock is gaining or losing momentum - if it’s the latter then a reversal could be around the corner.
This serves to remind you that a stock’s inclusion in or out of an index will have a material impact on the market’s interest in it, and can directly impact share price momentum. The same can be said for a share buy-back program.
Useful technical charts
If you like the look of a stock based on its fundamentals, and are seeking to time a trade or solidify a favourable entry (or exit) point, then these technical charts can be extremely useful:
Lets traders watch for spikes in volume, which often correspond with block trades. Intraday charts can be extremely helpful in deciphering exactly when large institutions are trading.
While most fundamental investors still tend to focus on the long haul, they still want to obtain a favourable buy-in price and/or a favourable selling price upon liquidating a position.
Pay particular attention to when a stock pushes through what called its 15- and/or 21-day moving average, as this typically indicates what’s expected to follow in the coming term.
Similarly, you can also use 50- and 200- day moving averages to determine longer-term breakout patterns.
Reactions over time
By looking at a chart of a specific stock, industry, index or market, you can determine how that entity has performed over time when certain types of news have been released. Remember these patterns tend to repeat over time.
Here you can see the market's reactions to Cedar Woods Properties (CWP) interm and half-year results announcements.
How fundamental and technical analysis adds value
Select stocks to include in your investing universe or 'watch list'
Time the entry into an already filtered fundamentally sound stock.
Determine whether a stock is overvalued or undervalued relative to its intrinsic value.
Manage the investment execution.
Avoid overvalued stocks or high debt companies to lessen risk.
Time an exit for the investment.
Skaffold members that use technical analysis
Spoonfed Investor founder, Sam Eder, combines technical analysis with Skaffold’s fundamental approach. Sam shared a few trading examples at Skaffold’s blog.