Geldpress

Fundamental analysis and technical analysis are two methods that investors (traders) use to narrow down the list of thousands of stocks into a single stock that meets their criteria of the day (minute) of buying or selling. With fundamental analysis of securities, investors make purchase or sale decisions based on analyzing financial statements, and determining a fair value. They buy when the market price is below their calculated fair value and they sell when it is above it.

Technical analysis, on the other hand, views financial statements as a waste of time. They view the market as efficient and maintain that all fundamental information is already reflected in any given stock price. They are more interested in the psychology of trading. Emotional responses to initial price movements lead to predictable and recognizable price chart patterns. The trend is your friend is their motto, and they jump in and out of stocks based on the initial price chart patterns that lead to a high probability of a predictable continuation pattern.

Years ago I would have sided with the fundamental analysts over the perceived voodoo of the technical analysts. But I recently came to my senses and have embraced technical analysis. I still use the fundamentals for a quick sanity check - is the company consistently cash flow positive and do they have a low or reasonable debt load. But I use technicals because they work quicker and more consistently then pure fundamental analysis. And in 2008 especially, I use technical analysis because the fundamentals are broken. Take a look at the wild price swings of a few 6 month price chart for 2008. Those wild price swings are the epitome of mass psychology, emotional responses, over reaction, under reaction, hysteria, confusion, and all things a keen understanding of technical analysis can help you capitalize on for the rest of 2008 and beyond. But the key is understanding the technicals better then everyone else.

Today’s recommended reading:

• Trading for a living: an older book written in 1993, but yet still very timely. Helps you dissect and understand your own emotional response the the markets - individual psychology - as well as the mass psychology of the market as a whole. But it goes beyond the psychology and breaks down all the key technicals, starting with a basic chart and and deeper into histograms, momentum, Williams %R, stochastic, relative strength and more.
• Technical analysis of financial markets: Slightly newer then the previous, last copyright in 1999. Not as much on the science of market psychology, but more in depth info on price gaps, continuation patterns, reversal patterns, Japanese candlesticks, Elliott waves, and other price cycles.

Trading for a Living: Psychology, Trading Tactics, Money Management by Alexander Elder

Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance) by John J. Murphy

The Geldpress team has just uncovered another excellent free stock screening tool for those that are completely opposed to paying fees for good financial tools. The downside to the free tools is that no one site has it all - clear and concise financial reports for at least 10 years, historical price data for stocks and options, and easy to use fundamental and technical stock screeners. But if you don’t mind jumping from site to site, you may want to add etrade’s clearstation site to your bag of tricks.

Start your search at the clearstation website, and then click tag and bag in the upper left hand corner. Then click on technical events under the first orange bar. There are 24 easy to use pre-programmed technical scans built in, but the one I find most useful is the first one on the list (Trending up - MACD bullish). You can limit each search to a particular exchange (NYSE, Nasdaq, etc), or bring up the results from all exchanges together. Clicking on the bullish MACD search initially brings up just the list of stocks with bullish MACD’s. A sample result is shown below from a July 16th screen:

Using the above data in combination with a more detailed chart view is highly advised. For a much more detailed view, click on one of the Graphs links, which will display the default detailed graphs as shown in the example below:

The top chart is a price chart using bar charts, which are much more useful then line charts because they show ranges of prices, and allow easy viewing of support and resistance levels. The top chart also shows red or green upper bars indicating positive or negative MACD.

The second chart is a volume indicator and very useful for confirming whether the price trend is accompanied by high volume spikes, or perhaps just a random price change. Next is the MACD histogram, which shows a more detailed view of the MACD then the top price chart does. The bottom chart is the stochastic histogram which can be used to measure overbought or oversold conditions. Registered users can customize individual graphs and settings.

Disclaimer: The data above is just a sample screen and in no way meant as a recommendation.

I’m a big fan of the free investment web tools (Google finance, Yahoo finance, MSN money), but I’ve always stated that the fee based tools are worth the money. The free information is quickly closing the information gap on the pay services, just a bit more scattered and time consuming to find. Sector rotation and industry ranking information is one key feature of many fee based financial tools, but I just stumbled across the Prophet.net site that gives it away for FREE!

Here is the top portion of a basic snapshot of the prophet.net industry rankings:

The image above only shows the higher rated industry groups so they are all green, meaning that the money is flowing into these industry groups. On the prophet.net website you can see the entire performance grid, including the bottom ranking industry groups (anyone want to take a guess?).

This layout of the chart is remarkably similar to the investools big chart, but with a few more bells and whistles. You can change the view of the prophet.net chart to either historical trends or current performance. I personally perfer the historical information, as shown in the image above. The trending is read from right to left, with the most recent data on the left. The numbers in the chart are industry group percentiles, as compared to other groups. In a nutshell, the higher the number, especially when trending upwards from week to week, signifies that big institutional money (mutual funds, pension plans) is flowing into that industry group.

The information is particularly valuable for ETF investors who want to be in the next heated sector. It’s also useful for those that want to maintain hedged portfolios using pairs of ETF’s - one long and one short for example. The proshares inverse ETF in an out of favor group could act as the downside hedge, along with an upside play on a hot performing group.

The stock screening tools mentioned yesterday are generally used for fundamental analysis screens. For technical analysis screens, there are also plenty of free scanning sites available, such as this one from stockcharts. It breaks out scanning data into several categories, including:

• new 52 week highs and lows
• overbought and oversold based on relative strength indicators (RSI)
• strong volume gainers and decliners
• movement beyond bollinger band ranges
• candlestick pattern potential breakouts

However, as with anything else in life, you do get what you pay for. The free tools are a great novelty, but I am quite happy spending money every month for access to a more sophisticated stock screening platform.

There are two types of traders - fundamentalists and market technicians. The fundamentalists don’t concentrate on dissecting the numbers - earnings, cash flow, balance sheet, future profit projections - to come up with what they perceive to be the value of a company. When the stock trades lower then their perceived value, they buy shares.

A market technician concentrates on price and volume pattern, and historical prices to determine when to buy and sell. This is not to say they don’t care about the fundamentals. They just take a leap of faith that the fundamentals have already been baked in by everyone else to come up with the range of market prices. And they also take extra caution during times when the fundamentals can change everything else - earnings season.

So what is technical analysis? It’s a study of the statistics generated by market activity - mainly past price and volume action. And it’s the extrapolation of those studies to make a determination of where the market is going next. There are thousands of indicators and study sets that a market technician uses, but they key is not to use all of them at the same time! In fact, the best approach I’ve found is to really narrow the field to just a few basic studies.

The examples below will use Boeing (BA) as an example only. And to ensure the most timely data, I will link to the Yahoo Finance pages so you can see the charts yourself.

Support and Resistance - Stocks will often stay within channels and bounce between support and resistance lines. When the price of a stock goes to low, the value investors are jumping in with their buy orders. The price point at which heavy buy activity starts is the support line. It is the low points in a chart at which the stock price stops going lower, and reverses direction to proceed higher. The resistance level is the exact opposite and it is the point at which people get nervous and stop buying because the perceived price is to high. Support and resistance levels are easier to see on range charts (bar or candle) versus line charts.

Moving Average - a moving average is a method to smooth out a jagged price chart, where each point on the moving average line is an average price over a given period. A 20 day moving average would utilize 20 days of information (today’s price plus the previous 19) for every point on the graph. Take a look at the Boeing moving average to see for yourself. The moving average is one of the simplest technical indicators. As prices broach the moving average line, many people believe it will continue in the same direction for a long enough time to yield a profit.

…Stay tuned for more technical analysis info… Coming soon at Geldpress.

How do you invest your money? Do you throw it at mutual funds and let someone else manage it? Do you throw it an index and just play the averages? Or do you try to out maneuver the market, and beat the averages by picking your own stocks? If you are in the latter category, the good news is that there are now free and simple tools available to everyone to help you filter out the losers, and narrow in on the winners. Yahoo, MSN and Google offer three of the most popular, well featured, and free stock screeners around. This article will help you get started.

1) The Yahoo Finance stock screener is a basic screener that allows you to search on 13 criteria, and also allows for limiting results based on either industry group or index membership.

2) MSN Money goes a step further and offers pre-defined Power Searches, as well as the manual stock screener where you enter each specific search criteria. If you believe in the power of momentum, then perhaps the MSN stocks at new 52 week high power search is for you. The power search automatically orders the results with the highest prices at the top. The disadvantage with the power search is that the resultant data is limited to only price and market capitalization info. If I could limit the power search results to only US based companies with high liquidity (> 500,000 shares/day), and stocks priced above 20, then the MSN power searches would be a regular stop for me.

3) The google stock screener has a very simple look and feel, but certainly not lacking in sophistication. I especially like the distribution graphic for the various parameters.

I also like google’s choice for the default search criteria using 4 simple parameters - market cap, p/e ratio, dividend yield and 52 week price change percentage. For my own screen, I used the following parameters:

• Market Cap: 2B to 100B (not to small and not to large)
• P/E Ratio: 10 to 40
• Dividend Yield (%): 1 to 3 (why invest at all if they are not sharing the profits!)
• 52 week price change (%): -5 to 50 (stay away from major losers, and bubbles in the making)

The above 4 criteria resulted in 111 companies. If I add a criteria for average volume over 500,000 shares, and stock price greater then 20, the results are then limited to 82 companies. To see the most recent results of the above search, use this google search link.

4) The Marketwatch stock screener also has a very simple look and feel, but goes a step further by allowing a user to enter both screening data and output data. The screening data entry is very easy to use and allows criteria based on price, volume, fundamentals, and technicals. It also allows results to specific exchanges or industries. Once all the search criteria are selected, you can then choose how to display the results, selecting which fields are displayed as well as which field to key the sort from.