Fundamental vs Technical

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captain_chaza

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Monday, June 23, 2003 - 09:53 pm:

"Fundamental v Technical "

“No man can serve two masters,” wrote Saint Matthew.

There are two basic approaches for deciding the future direction a sailing ship of any size and design might move.

The fundamentalist approach is faced with a massive information-gathering problem. Every fact relevant to the craft must be known and weighted according to its importance and its price equation. The skipper here assumes his own interpretations and his known facts are better than average.

He will analyze all the facets of world politics and its effects on the global economic community on a regular basis. He will study each member of the global exchange from currencies and interest rates to commodities and raw materials, to the latest developments in design technologies in the multitude areas of human activity.

He then turns his head to the economic statistics price/earning ratios, dividend yields, company reports on as many ships as he can mentally digest and consume as much written matter time allows. This is truly an awesome task for any skipper even those with a crew of skilled academics on each floor of a high-rise office building.

Unfortunately for the fundamentalist by the time he receives most of his information and statistics it is hopelessly out of date. By the time he evaluates and mixes up his recipe for a rational decision the moon has moved the tides. He often complains he is living in an irrational world and that the world has just gone temporally mad. Naturally, “She’ll be right in the long term,” he always says.

How often does a ship move in the opposite direction immediately after a good or bad report? Since information is never leaked in this fairest of all sports with its strong rules of fair disclosure, he will often claim an event has already been factored into the equation by the gamblers. How often does he cling to the skimpiest of fundamental good news as the price descends deeper and deeper south?

Because this has happened so often in the past it has even turned some fundamentalist heads inside out and they have developed a reverse fundamental approach.

This down-under, upside-down fundamentalist or contrarian viewpoint has surprising much to offer. Here the skipper has acknowledged the fact that punching the latest fundamentals into his computer will result in garbage.

He has accepted the fact that everything has been leaked and that it is not a fair game at all, but All-Out War.

Also, in view of his past experiences he has decided that he hasn’t been as close to the good information chain link as he would have liked and refuses to be fair game in the future.

The Technical believes that no fundamental fact whatsoever matters unless the masses have this shared psychology and provides the only mechanism to measure this irrational and emotional component.

Any experienced campaigner knows and the novice will soon discover how deeply the counter productive aspects of tension, anticipation and anxiety alter the way a skipper sails the seas. Usually directly proportional to the funds committed.

The technical believes the oceans are extremely efficient with its global sharing of information and regularly observes the actions of others, not their talk.

The technical can put objectivity at the helm and control the nemesis of all sailors at sea on the Global Exchange namely, emotion and rationale. They provide the mechanism to set entry and exit points, set risk/reward ratios and even foster a safety and risk management approach to sailing in all types of sea and weather conditions.

Technical allows the skipper to step back and gain a better insight and perspective of the Global Exchange and carry out numerous ship surveys. A chart is worth more than a thousand words.

The technical viewpoint encompasses every participant’s knowledge and beliefs about the future direction a craft may head next. It takes into account all the known facts as well as the human interpretation of those facts. More importantly it also takes into account fundamental news not yet known to the general public and is right up to date.

Finally, the fundamental academic with the I know all attitude who has ridiculed and under estimated his technical opponent for so many years, now believes he has room on board for some technical.

Unfortunately, as more and more skippers sail on technical, more ships are now moving accordingly, there is no room onboard for any fundamentalist with his long term excuse and his minuscule amount of up to date facts. He is in fact a most dangerous dinosaur to have onboard. He must be avoided at all costs and only regarded as fair game. Whether he is a bull or a bear he cannot change his spots and will always cloud a skipper’s judgment and coarse many costly delays.

Sailing in this modern era is about the

Technical verses Technical.

Bon Voyage
Captain Chaza
capn

squiresk

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Saturday, June 28, 2003 - 06:34 pm:

Excellent.

Compelling reading.

Kai

snifter

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Post Number: 391
Registered: 11-2002

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Sunday, August 03, 2003 - 08:10 pm:

Yes, good stuff from Chaza...he's a man who brings both common sense and realism to market analysis.
What surprises me is that Claudius hasn't written a lengthy reply to point out to Chazza how mistaken he is!! LOL

Years ago I subscribed to a newsletter that gave stock recommendations based on a survey of 17 brokers/analysts, all of whom used fundamental analysis to choose stocks.
My thinking was that I'd use these analysts to supply me with a regular list of companies that had good fundamentals, then I'd run technical analysis over these companies, and trade those whose technicals married up with their fundamentals.
I felt sure this would give me the edge I was looking for, but it didn't work.
The companies picked by the 17 analysts usually had stock prices that were in very decisive downtrends - you wouldn't buy them in a fit.
Rarely did they recommend a company whose stock price was in an uptrend, and when they did, it was usually an uptrend that had been in force for ages and the stock had already posted big gains...not the time you'd want to buy.

All in all my good idea of marrying fundamental and technical analysis was a dismal failure.

To cut a long story short, charts and technical analysis are the way to go if you want timely entries and maximum profit from trading.

Fundamental analysis is great if you want to increase your workload and adversly your profits.

Cheers,
Snifter

mosaic1996

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Sunday, August 03, 2003 - 08:22 pm:

Snifter,

Stan Weinstein is held in high regard by this forum. Do you agree that Stan Weinstein knows what he is talking about, and is more accomplished than all traders on this forum?

Cheers,
Mosaic

snifter

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Post Number: 393
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Monday, August 04, 2003 - 07:34 am:

Mosaic

I suspect that there is more to your questions than meets the eye, but seeing as I haven't managed to find your 'hidden meaning' (if indeed there is one) I'll dive right in and answer you!

I believe I was one of the first blokes on this forum to mention Stan's book and methodology, and since then I've had many positive things to say about him. My trading improved after I studied Stan's book and began implementing some of his ideas. I've recommended his book to many struggling traders and they credit Stan and his ideas for turning their trading results around.
Yes, obviously I do agree that generally speaking Stan knows what he's talking about, but that's not to say I agree with every single thing he says.

Is he more accomplished than all traders on this forum?
I can't answer that...I don't know what his level of accomplishment is and I don't know the level of accomplishment of every trader on this forum.

Cheers,
Snifter

mosaic1996

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Monday, August 04, 2003 - 09:30 am:

Snifter,

You are quite right to be suspicious of a closet fundamentalist.

I recently read Stan's book (which has taught me heaps) and was sure that you would be a devotee, and would most likely fall closer to his investor type than his trader type.

I had a recollection that Stan acknowledge that fundamental analysis could work well for some, but not all/most. He further stated that most super traders/investors combined fundamental analysis with technical analysis. Unfortunately I can't find the reference in his book. Trouble is I also recently read Come into My Trading Room by Elder, so I may have my books mixed up. Of course there is another possibility - I dreamt it, in which case it is more like a nightmare. I will keep browsing both books to see if I can find the quote. Bugger!

Anyway, wiping the egg of my face, I offer the following:
-most people can lose money or market perform using fundamental analysis
-most people can lose money or market perform using technical analysis
-some people can make good money using technical analysis
-some people can make good money using fundamental analysis.

I believe that it is easier to devise a technical approach that yields superior returns. The system can be very mechanical, and non-emotive.

However, I believe that there are a significant advantages of understanding the fundamentals that are likely to be driving the share price. I don't mean p/e. and the financials of which the inexperienced speak. I mean the broader operating environment of the companies. For example,
a) a stock is the subject of a takeover offer - further upside may be limited.
b) new management appointed - stock will usually have a spurt, but then new management has to deliver results before further advances
c) refocus business - similar to new management
d) technological breakthrough - likely to be rerated significantly over a period
c) fundamental change in the business environment - e.g. Lang Corp/Patricks and the waterfront dispute - a long and sustained advance

This knowledge gives you insight into the likely price action of a share. I agree that technical analysis is better to flag exits since markets vary rarely act in a rational manner. However, the fundamentals gives great insight into the likely patterns that will develop in the charts.

A question!. How does a Stage 1 stock turn the corner into a Stage 2 stock? I would be interested in your view, but my thoughts are as follows:
a) investors/traders identify this stock as having potential based on fundamentals (financials and or environmental). Occasionally this is by insiders, but most frequently by smart money.
b) technicians identify the strength and monitor/enter the stock
c) normal retail investors enter
d) etc.

So I maintain that it is fundamentalists that initiate a change from Stage 1 to Stage 2, with the savvy technicaian entering shortly thereafter.

As a simple example of fundamental analysis yielding returns, I would offer the following threads on MOS (Mosaic Oil). Based on analysis of publically available information, the price action of MOS is predictable with a fairly high degree of accuracy.

http://forum.incrediblecharts.com/messages/8/112259.html

http://forum.incrediblecharts.com/messages/8/124584.html

Cheers,
Mosaic

peterloh

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Monday, August 04, 2003 - 11:58 am:

Hi Guys

I acknowledge the many valuable contribution in this column.The issues raised in the discussion has been interesting. May I bring in a different dimension to this debate.This is the influence of the financial services industry.

Fund managers do have significant influences on share prices, lets not kid ourselves. Most of the fun managers rely on fundamental analysis. Some do use technical analysis to assist them. To a big extent, the fund managers are constrain by the indexation issues. They are also constrain by the parameters, the objectives and other areas on how to invest.Their research include talking to management of the companies and going to the location where the company operates. Their system do have that advantage.Fund managers may not be able to deviate a lot from the index, known as tracking error.

However, not all companies are compel to tell them more than what they should know as in accordance with ASX regulations.

Technical analysis mainly acts as a filter of the sentiment.To a certain extend there is information available to some which is not available to others. In other words the market is not as perfect as we wish it to be.This is more so on shares outside the indexation and not so well researched.Also directors do not feel that they are obligated to disclose certain matters when they think it is not relevant or time to disclose yet.The ASX interest is to have information available to all at the same time which is good in theory but does not always work out in practice.

I do use fundamental analysis to assist me in my shares selection.Having selected the shares I do use technical analysis to time my entry.By using both has served me well but it has also trapped me as well.My background is a bean counter but I do not pay attention to areas like ratios etc except the company is still making money, pay dividends etc. I find it useful to know whether the trading enviroment of the economy has changed.A good example is the introduction of GST and the subsequent first home loan grant, an intervention by government. Understanding the issues involved ,I use analysis to time my entry.This has served me well and enable me to select the right building material companies on their breakout.

An example where I did not have the benefit of fundamental analysis but understand the improvement of its share price is CTX. I have caught the initial rise but decided to exit at about $2.70, thinking it has been fully price, especially when profit has half compared to last year in the first half. One aspect that I have overlooked was that more refinery has to be closed down and CTX has been better equipped to deal with it having prepared itself for the upgrade. If I haven't exited and based purely on chart, I would still be holding CTX.

An area that cause me to have exited earlier than I should have initially is the opportunity cost, where I think where I can have better use of the funds.Other area which I may delay my exit is having my CGT half once the investment has been kept over 1 years.

For shorter term trade, fundamental analysis is not important at all where I trade just for a profit without consideration whether the stock is overprice or otherwise.I use chart to assist me, and I also use open market too for a trade.

Currently I am enjoying the best of both worlds.
My primary objective is to preserve my capital in a trade. This is second nature, where you buy low and sell high. I do not line up all the ducks as I know the initially breakout is all the confirmation I need because I understand the economics of things. The broad understanding of the company and the reasons it will do well is my duck. My choice then is whether to have it as a short term trade or to keep it in my portfolio because of its potential.

So I have the luxury of all the benefits available, whether it is from FA or TA or being an open market trader, where one basically buy low and sell high on open interest.To me it is dangerous to be an extremist what ever you are.

Cheers

Peterloh

-------------------------------------------------
Disclaimer: Please note that comments made in this column is not made in my professional capacity and should not be taken as advice.Any share discuss is for general interest and should not be relied on to make an investment decision.Please consult your stock broker or financial adviser in regard to your personal situation.

snifter

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Monday, August 04, 2003 - 04:41 pm:

Peterloh

I think what you're saying is that fundamentals are responsible for most of the stock movements we see, either up or down.
I daresay you're correct...most bullish trends have good fundamentals as their underlying cause, or bad fundamentals in the case of a downtrending stock - AMP for example.
Of course there are other factors at play, such as peoples' perceptions and emotions. But by and large its the economic health of a company, either it's current health or its likely future health, that will determine it's share price movement.

Since its largely the fundamentals that affect the share price, it would seem logical that we should study company fundamentals in order to get some insight into future price action.

Readers of this forum will be well aware that my comments show a very strong bais towards technical analysis.
Therefore you and others may be surprised to learn that I ALWAYS study the fundamentals before I get into technical analysis of any stock.
How do I study the fundamentals? By looking at the chart, or more specifically, by identifying the medium and the long term trend of the chart.
Let's use AMP as an example.
By about June last year there could be no doubt that the fundamentals of AMP were crook.
Why? Because the stock had broken below support on the weekly chart, the 15/30 week WMA's had turned negative on the weekly chart, the weekly price action was making lower tops and lower bottoms...I could list other technical reasons but I'm sure you get the picture.
This price action was a result of people quitting the stock in a big way.
Why were they quitting the stock?
Almost certainly because the fundamentals were crook.
How they knew the fundamentals were crook is of no interest to me. I'm interested in the facts, but I'm not interested in specific details about the reasons underlying the facts.
One of the most valuable lessons Weinstein taught me is to stick to basics - sort the wheat from the chaff.
The fundamentals of a company are the wheat, the details of the reasons behind those fundamentals are the chaff.
Using the charts to tell you the fundamentals is the most efficient way I know of getting straight to the wheat.
Reading papers and searching for specific details of the fundamentals can result in getting so snowed under by chaff that you might have difficulty finding the wheat.
The chaff is nothing but a hindrance to me...its the wheat I'm interested in.
And its ridiculously easy for me to find the 'wheat', or in other words the bare facts that the company fundamentals are good, bad, or mediocre.
All I have to do is identify if the weekly trend is up (good fundamentals), or down (weak fundamentals), or sideways (mediocre fundamentals).
This trend identificaton is as simple as looking at a weekly chart and observing the price action and a couple of moving averages - about a ten second glance at a chart is all it takes.
By comparison, I shudder to think of the time and work involved in trying to find out the fundamentals by reading the financial pages, studying company reports, looking at earnings and projected earnings etc etc.
Not to mention the fact that I have little chance of getting this information in a timely manner that enables me to get a timely entry into the stock once it begins a trend.

As with any undertaking, there are efficient and inefficient ways of doing things.
Charts are the effecient way of getting you straight to the information you need to know in order to make profitable trading decisions.

Standard methods of fundamental analysis is the cumbersome and time consuming way to attempt to find out the same basic information, albeit in more detail.

Look at charts of CTX, TIM, GUD, MAP, DJS.

A study of weekly price action and 15/30 week WMA's identified the time when these stocks began uptrending (almost certainly as a result of positive fundamentals).

The uptrends shortly paused or retraced as profit takers sold out.

Technical indicators (ROC, Stochastic, Parabolic, RSI etc) flashed buy signals when the retracement was over and the trend resumed.

The above trading system combines fundamental analysis (via trend identification), with signals from technical indicators.
It sounds ridiculously simple and it IS ridiculously simple, not to mention VERY effective.
And the best part is that this combined fundamental/technical system can be implemented without spending one single minute reading the financial pages or searching for fundamental info, other than what the charts divulge.

Peter, you asked me for my opinion on what causes a stock to make the transition from stage 1 to stage 2. I can only assume that some positive fundamental information becomes known to people within the company, who either act on it themselves or pass it on to their mates and relatives, or perhaps do both.
This buying and the associated breakout is noticed by some of the share investing public who also start buying. A bit further down the track the details of the fundamentals become public information, which causes more traders to want a slice of the action.
And so a new uptrend is born.

Cheers,
Snifter

peterloh

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Monday, August 04, 2003 - 06:16 pm:

Snifter

Your explanation of your type of fundamental analysis is interesting but does not tell a good an interesting story.All you do is look at charts, higher highs and higher lows.

Does the chart put a face behind the story, does it mention of the great new invention, or the bio-tech discovery, war in the middle-east, or what drives the price of gold price up, so on and so forth?.

Lets said we are both interest in recovery shares. If I have a choice DJS will never be in my selection of a good trending stock. If you have a selection of good quality shares in recovery stock, this share would never have made it. For a short term trade, yes but not one that will made you several hundred percentage point.
Despite the recent spite up in price, I would like to ask what else has it got to offer, failed food courts,delicatesan stores, it is more a heart break story. If you visit the departmental you will also be in a position to assess the situation yourself.

On the other hand SGW will be an interesting recovery story. Poor management of gold business, cut costs, lower hedging of the $, and recovery of global economy will definitely aid its recovery, as it also has control of the world market in tantalum to a certain extend.A world recovery will definitely aid the company.

If you do not treat it as a job you will maintain your interest .I find this is a world of hope, with so many new discovery in biotech, new invention from VCR relating to the heart, new market in China for our commodities and other products. Behind every success there is an interesting story for us to read and enjoy.I do not think it is too tedious unless you dot the i's and cross all the t's.

I respect your views Snifter, perhaps I am too old fashion always looking to a good story.I still look at this investment business as a hobby and I live with it as part of life. With the invention of computer, internet etc all the information is at your finger tips.It is not that difficult to research nowadays. Everything is so convenient.

Having said the above I must admit I cannot do without charting. Putting the two together has enabled me to maximise my profit position further than I have if I relied on fundamental analysis alone.

I find that the more informed I am, the better position I am to make a decision.

Cheers and good trading,

Peter

snifter

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Monday, August 04, 2003 - 10:25 pm:

Peter

You're right, all I do is look at charts, although I look for a little more than just the higher highs and higher lows that you mentioned.

And you're again right when you say that charts don't tell a good interesting story, or put a face behind the story. Nor do they tell of the great bio tech discoveries, the political situation in the Middle East or anywhere else, the new pipeline deal, the reason for the price rise in gold.
And do you know what Peter?...I'm very glad the charts don't give me this sort of information, because this is unnecessary information that is surplus to requirements and won't help me to trade any better. In fact it will virtually guarantee that I'll trade less well, because by the time I get this information the stock will have already have reacted to it, and I'll be too late to take advantage of that reaction.

COH rose from about $3 to over $50 because it developed the bionic ear. The bionic ear was one of those good and interesting stories that you talk about - a brilliant biotech discovery, but to make money from this stock you had to trade the price action, not the story behind the price action.
All you needed to accomplish this was a chart and the ability to decipher the information the chart was giving you, and the courage to act on that information.
The chart didn't give you the details of the bionic ear story, but it gave you something more important from a trading perspective...a summary of the underlying fundamentals, and it presented this summary so clearly that there was no doubt that something very exciting was happening in the Cochlear company.
The chart gave you the ability to sort the wheat from the chaff, to cut through the superfluous details behind the new uptrend, and to concentrate of the uptrend itself, and on getting a timely entry into the uptrned.

With regard to DJS...to make money from this type of stock I don't need to visit the department stores and look at the state of its businesses. All I need to do is look at the chart, identify when a new trend has begun, and use a simple entry strategy to hitch a ride on the trend, and a simple exit strategy that causes me to jump off the trend when its over.
Maybe this stock won't make hundreds of percent profit as you say, and then again maybe it will.
In any event, its made a very substantial gain so far for those who used technical analysis to make a timely entry into the new uptrend.
SGW is another one that has posted impressive gains for early trend boarders - once again, no knowledge of the fundamentals was needed to trade this trend profitably, apart from the summary of the fundamentals that was provided by trend analysis.

My over-riding concern with standard fundamental analysis is the fact that its usually so late by the time you get the information, that you miss the opportunity to act upon it.
Do you agree with this Peter, or have you discovered some way of getting the fundamental info far more quickly and efficiently than I have?

Cheers,
Snifter

peterloh

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Tuesday, August 05, 2003 - 07:10 pm:

Snifter

I do concede to a certain extend, sometimes information are slow in coming out to the general public, that is precisely the advantage and usefulness of technical analysis.

Just as a matter of interest, how do you come to pick shares like CTX TIM GUD MAP and DJS without knowing what the share is in the first place.Surely you must at least know what the companies are doing!!

Whether you choose to research it in details or just have read a bit about it is still fundamental information.

I use technical analysis but not to the extend of totally unaware of where I put my money. It does seemed a bit far fetch.Maybe like Nicola said in another thread, have some rum, maybe we will know a bit more.

Cheers

Peterloh