"Most of the time common stocks are subject to irrational and
excessive price fluctuations in both directions as the consequence
of the ingrained tendency of most people to speculate or
gamble...to give way to hope, fear and greed.
- Benjamin Graham
Fundamentals are the primary focus of my small-cap stock
investing strategy. Ultimately, fundamentals determine the
long-term direction of a stock. But long-term growth and strong
fundamentals alone don't assure successful stock market
As with most things in life, timing is everything and investing
is no exception. Fundamental research must be complimented by
technical analysis - a useful tool for determining the ideal time
to buy or sell a stock.
One simplified way to think about it is this: fundamental
analysis helps you decide
to buy; technical analysis helps you decide
to pull the trigger.
We've used technical analysis to help time our
Small Cap Investor PRO
recommendations. Two silver stocks have rallied strong since our
recommendation was published, and one is up over 100 percent!
Learn more about this silver opportunity here
Before the advent of the internet, technical analysis was a
cumbersome process because it demanded constant monitoring of a
stock's price and volume, as well as calculation of moving averages
and other metrics. Historically, technical analysis was not
available to the average investor. However, technical analysis has
been reborn due to automatic calculation of stock charts, multiple
moving averages, instant calculation of even the most complex
formulas, and-most important of all-simple and inexpensive
to streaming quotes.
All of these metrics are essential for technical analysis, and
the good news is that today even an amateur technician has a stream
of data that would make the best-heeled technician of just 25 years
ago green with envy. If you have a personal computer and an
internet connection, everything you need to perform technical
analysis is at your fingertips.
Many technical analysts, known as technicians, believe that
price and volume are the whole story, that tracking price action
anticipates and foretells the next price direction. There is a
degree of truth to this belief, and I urge everyone to employ
But technical analysis can become a self-fulfilling prophecy,
with every trader examining the same charts, looking at the same
movements and trends, and making the same trades as a result. This
is the case now more than ever, with increasingly popular program
trading by institutional investors.
So rather than using technical analysis exclusively, it's
important to realize that a combination of fundamental and
technical tests makes the most sense and yields the best
Even if you are dedicated to the study of the fundamentals, a
range of technical indicators is valuable. These indicators serve
as a means for quantifying market risk, confirming what the
fundamentals reveal, and signaling a change in the current
For the uninitiated, technical analysis seems to be more like
magic than a useful system of patterns, trends and charting
methods. Neophyte investors tend to associate technical
investment philosophy with high-flying, risk-taking day-traders -
making huge profits on tiny market fluctuations - and sometimes
losing it all when a trade goes the wrong way.
While that's certainly true for a small segment of technicians,
the truth is that basic technical analysis has a part in anyone's
investment strategy - even long-term buy-and-hold types can
benefit. After all, the difference between a successful
investor and an unsuccessful one is sometimes just a few percentage
Some of you may disagree. All you hear from the buy-and-hold
crowd is to simply buy, forget, and wait for big returns to
accumulate. That trying to second guess, or time the market, is a
fool's game. Many mutual fund managers wouldn't be doing their
job if they didn't tell 401(k) investors to simply pile a chunk of
their paycheck into their fund every month.
They don't want you to realize that they are not necessary.
Technical analysis simply says, "The stock market isn't
random. It behaves in very predictable patterns - documented
by trillions of transactions over a period of more than 100
There are plenty of big-picture technical indicators that can
help people decide when they should throw more money (or less) into
a mutual fund.
So, technicians spend their time looking for these well-worn
ruts of market habit. When you invest with a trend that's
happened thousands or millions of times before, you can certainly
go wrong - but you increase your odds of success.
We'll tackle some of these technical aspects tomorrow. For now,
just open you mind to the possible benefits.