This column was originally published on RealMoney on Aug. 3 at 10:20 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Wednesday's discussion in
about the differing conclusions of various technical analysts touched on one of my favorite pet peeves: The use of raw ignorance as grounds to dismiss an entire discipline of market analysis.
I'm often amazed at the number of people who are so full of themselves that they feel they know pretty much everything there is to know. And if they don't know it, then it's just not worth knowing. That's what I was thinking Wednesday when I read a
about the uselessness of chart analysis by a college professor who fancies himself a wine expert, and commentator on law, business, economics and culture. Man, if you're going to dismiss an entire analytical discipline, you'd better bring more than a corkscrew and a law degree.
I don't really find the upside in defending chart analysis because I use both technical and fundamental information for stock selection in my trading. Also, both technical and fundamental analysis are skill games. They aren't rules -- they are tools. Some are good at using these tools; others only wish they were.
Using both fundamental and technical analysis is actually pretty simple -- even a college professor could probably understand this. But, to make this hybrid analysis more enticing to intellectuals and to give the impression of complication and inaccessibility, let's call the analysis of both fundamental and technical data "The Bipartite Form of the Concurrent System of Market Analysis." There, that's better.
Price and volume data are used to get a picture of the supply and demand for a stock. A skilled analyst can get a pretty accurate estimate of where and when the majority of investors bought or sold a stock. This estimate provides insight into the probable reaction of the buyers and sellers when a stock hits various price levels. Essentially, it's a study of
. The last time I checked, no one was disparaging that discipline.
By its nature, technical analysis is for shorter-term work. As such, I use this type of analysis for entries, exits and stop placement.
But I also look at the health of the underlying company. After all, if there were no company, there would be no ticker symbol. The health of a company is revealed by various financial data -- fundamental analysis. Because businesses evolve over time, fundamental analysis works pretty well for assessing whether a company is likely to be stronger or weaker over the next year or two. So this financial data tends to work better for longer-term analysis.
That is a very general description of The Bipartite Form of the Concurrent System of Market Analysis that I use.
A few other random thoughts and questions:
- I could build a house without a measuring tape. However, just because I can doesn't mean I should. And just because I can doesn't mean that a measuring tape doesn't work. (By the way, I could build a better house using a measuring tape).
- I don't know a thing about astrology except that I am a Capriquarius, born on Jan. 20, right on the cusp between Capricorn and Aquarius. But just because I don't know a thing about astrology doesn't mean that it's useless in market analysis. Rather, it's just useless to me! Many people are quite successful in timing the market using lunar cycles and who knows what else.
- Komag (KOMG) gets a lot of coverage by fundamental analysts. Their various ratings are buy, sell, hold, accumulate and underweight. Now, some of those guys are going to be proven wrong. Do you think the ones who get it wrong just missed the mark on Komag, or do you think that fundamental analysis is useless?
- Why is it that economic theory makes use of leading and lagging indicators, graphs and charts, but that seems to be OK?
- By the way, technical analysis is also called behavioral finance. Doesn't that sound like it would work a lot better than technical analysis?
- Really smart people, including a Nobel Prize winner (which means he's really, really smart), have noted that behavioral finance pretty much defies the Random Walk theory. Am I the only guy who knows this, or do people who don't know how to analyze charts just conveniently overlook this in their extensive research on the subject?
OK, let's take a random walk through a few charts.
announced solid earnings Wednesday and the stock gapped higher, but the buying was short-lived and the stock sold off for the rest of the day. I'd look at about $97 to act as resistance now, and I'd expect a bounce off prior support at $85. However, if $85 breaks down, I suspect that Garmin will have a lot farther to fall.
This 2005 superstar has been grinding a lot. With two lower highs over the past four months, any additional decline in
will effectively end the uptrend. If you're long, consider a tight stop. As for shorting, remember to distinguish between what you think should happen and what is happening now. The stock is at support. That merits a short-term long bias. I'd wait for further weakness before shorting this. If Google breaks down further, there will be plenty of time to capitalize on it.
About a month ago, I wrote that I'd only buy the breakout in
Las Vegas Sands
after it was tested. The test occurred a short time later and the stock broke down. The breakout failed, and the stock also fell below a longer-term trend line. I'd stay away from the stock for the time being, and I'd protect any current position with a stop below the current weekly low.
is right back down to established support at around $35. On Wednesday, Jim Cramer mentioned that the company was taking a lot of action to bolster the stock. From the looks of the chart, I'd say that the stock is ripe for a bounce. I also like the risk-reward aspect of this stock. Place a stop just below support and risk less than $2.
has been trading within a $15 range for the past couple of months. If you're long, keep in mind that the stock could fall clear down to $140 before support is tested. And if you're short, consider placing a relatively tight stop on this stock.
Be careful out there.
At the time of publication, Fitzpatrick held none of the issues mentioned, though positions may change at any time.
Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.