February 15th, 2007

Fundamental vs. Technical Stock Analysis-III: Getting Started

I hope I’ve made the case in my last two postings that, in my estimation, fundamental analysis is:

  • flawed as a process in mining for good stocks to buy,
  • a poor tool for deciding when to sell stocks you already own and
  • an approach that leaves you disadvantaged against big money market participants

So what technique works best to improve the odds for not only making money but also consistently producing results than putting your money in an S&P Index fund or buying SPYDERS (the S&P etf)? I believe it’s technical analysis and, specifically, monitoring the action of stock prices and volumes using stock charts.

But you can’t just buy charting software (like Worden Brother’s TC2007, the software I’ve been using for close to 10 years) or subscribing to a service (like StockCharts.com, BigCharts.com or BarChart.com). It’s a big stock market world with up to 10,000 stocks to pick from and continually growing with the continued addition of new etf’s.

Some personal history might be instructive at this point. I had no procedure or rules for using my charting software when I first got it. I tried various filtering strategies (stochastics, Money Flow, Bollinger Bands, MACD …. for a comprehensive over see Wikipedia on Technical Analysis). I built custom filters looking combining various financial and market variables such as earnings growth, p/e ratios, dividend yields and price relative strength. I’d page through hundreds of individual stock charts, until I got worn out, looking for classical patterns such as triangles, heads-and-shoulders, wedges and channels.

Seeing a promising pattern, I’d buy the stock hoping that it would be completed with a successful breakout. More often, however, I’d be holding the stock for long periods waiting for a breakout or, even worse, the stock would me in the opposite direction and I’d wind up holding the stock waiting for it to recover.

The problem was that:

  • I didn’t have a method of reducing the universe through some prescreening approach
  • I attacked the universe of stocks as if all stocks were homogenous and that the only thing that mattered was the chart itself
  • What I needed was a process, methodology, some rules …… a discipline.

I found it after I began subscribing to Investors Business Daily.

to be continued ……..

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