Combining Technical Analysis

Technical Analysis works best when the Intelligent Investor combines it with the Analysis of Financial Statements. By itself, Technical Analysis is not very accurate. It is like flipping a coin. During a bull market, Technical Analysis may trigger a sell signal, but yet stocks move higher. During a bear market, Technical Analysis might trigger a buy signal, and yet stocks continue to fall.

Technical Analysis is very useful when the Intelligent Investor is looking to buy stocks of a company that has a Durable Competitive Advantage. It is also useful when selling out of companies that do not have a Durable Competitive Advantage. When the P/E Ratio of a stock is way above 40 or when the stock price becomes too expensive, Technical Analysis can be useful here as well. Given these conditions, use it as a tool to find an entry or an exit point.

 

Conditions when to use Technical Analysis

 

Using Technical Analysis to Purchase Stock of a Company with a Durable Competitive Advantage

 

Example 1

IBM is a company with a Durable Competitive Advantage. On October 2014, it's stock price plunged after they reported dismal earnings and a bleak forecast. At $155 per share, the stock is trading below the Bollinger Lower Band. The MACD Oscillator is rising. The Volume is decreasing so it may indicate a change of Trend to the upside. Based on Technical Analysis, the stock may be oversold.

IBM Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

Example 2

Exxon Mobil, another company with a Durable Competitive Advantage. On October 2014, it's stock price plunged after meek reports concerning the price of oil. At less than $90 per share, the stock is just traded below the Bollinger Lower Band. The Relative Strength Index (RSI), Fast Stochastic (FS), and Slow Stochastic (SS) Oscillator is below the lower limit. The Volume is decreasing so it may indicate a change of Trend to the upside. Based on Technical Analysis, $90 could be a good entry point.

Exxon Mobil Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

Using Technical Analysis to Sell Stock of a Company without a Durable Competitive Advantage

 

Example 3

Tesla is a revolutionary electric car company. But as of the year 2014, it does not have a Durable Competitive Advantage. Cars isn't something people buy everyday. Tesla is a lovable company. But at close to $300 a share, the stock price is too high. The price just came from the Bollinger Upper Band. There is also divergence between the price and the MACD; the price heads higher, yet the MACD Oscillator goes lower.

Tesla Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

Using Technical Analysis to Sell Out of an Expensive Stock

 

Example 4

Netflix, love the service but not the price. Throughout the year 2014, the P/E Ratio is above 100 which is really pricey. At close to $500 per share with earnings of only $3.76, this stock is just way overbought.

Netflix Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

Using Technical Analysis to Buy Into a Bottom During a Stock Market Crash

 

Example 5 - Black Swan Event (Sudden Drop)

In March 2020, a pandemic has swept the world, the stock market has crash faster than we could imagine, and we are looking for a bottom. This example shows what we are looking for during a sudden drop in the markets. A sudden drop in the stock market is when the slope of the price drop is too steep. Viacom at $10 per share in the year 2020 is just way too undervalued.

Viacom Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

Example 6 - Typical Recession (Single Bottom)

There was a stock market crash that started in the year 2007. By 2009 the crash has turned into a global financial crisis. This example is a typical recession where the drop in the market is gradual and the slope of the price drop is not too steep. Google adjusted for stock splits trades for around $130 per share in the year 2009.

Google Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

Example 7 - Typical Recession (Double Bottom)

In the same year 2009, as the example above, this one is also typical recession where the drop in the market is gradual and the slope of the price drop is not too steep. Apple adjusted for stock splits trades for just below $3 per share in the year 2009. In this example, we have a double bottom, 2 opportunities to buy at a low price.

Apple Combining Technical Analysis
Source: Thinkorswim by TDAmeritrade

 

My Financial Analysis of Stocks

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