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The Real Story: Picture Worth 1,000 Words

There are two main schools of thought on Wall Street. Some believe that fundamentals are all-important when analyzing a stock. They can't be bothered with ascending triangles, stochastics or other technical indicators. Earnings, cash flow and the predictability of those numbers are what drive stock prices, according to the fundies.

On the other hand, pure technicians believe that information is already in the stock price. They look at supply and demand of the security. Channel checks, meetings with management, and earnings models won't tell you the trend of the stock as far as they're concerned.

"Price is fact. Earnings on the other hand are estimates," says Ralph Acampora, the head of technical research at Knight Capital Group. "You restate earnings. You never restate price."

Then there are those (like me) who believe both methodologies are functional, although perhaps not always equally. I find technical analysis especially useful when working with contrarian investment ideas. One of the downfalls of contrarian investing is that sometimes you have to wait before your thesis is played out. For example, I could be correct that Lamar Advertising's (LAMR) business is not as robust as the bulls claim, as detailed here.

But it could take a few months for that to present itself (or it could take some time before the Street begins to care). Using technicals to refine your timing can help the contrarian sleep at night knowing that the odds are tilted in your favor. It's certainly no guarantee for success, but it's similar to betting with the house instead of against it.

For example, I presented a bearish case for P.F. Chang's China Bistro (PFCB) earlier this week.

As you can see from the chart below, the stock broke a trend line that had been valid for more than five years. The longer a trend line is in effect, the more significance is placed on a break. During rallies, the stock failed to penetrate the level of the break. The shift in the technical picture indicates to me that something has changed dramatically.

Losing Its Sizzle
P.F. Chang's China Bistro breaks its long uptrend
Source: StockCharts.com

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