Connect with us


How You Can Use Fundamental Analysis And Technical Analysis Together

Enjoy the best of both worlds.

When it comes to stock analysis, fundamental analysis and technical analysis are two main schools of thought used when researching for the right stock to invest in.

Fundamental analysis involves looking at the actual value of a stock. Fundamental analysts mainly study overall economic conditions, to the financial data, and management of a company when making investment decisions. Hence, historical returns, working capital, and dividend history of a company will be of interest.

Technical analysts on the other hand, formulates their investment decisions mostly on patterns and charts. They predict future movement of prices with the help of technical indicators.

In this article, we will not get into details of how they both differ, but instead on how investors can combine both when making investment decisions.

Read Also: The Battle Between Fundamental And Technical Analysis

Examples of confirming fundamental trends with technical indicators:

#1 Volatility relationships

The reported revenues and earnings are unpredictable with scenarios such as these:

  • Earnings are positive for the first year, followed by net operating losses the next
  • Many one-time adjustments appearing
  • Non-core profits from selling assets (this distort earnings per share)
  • Management cannot control expense

In these situations, fundamental volatility makes growth forecasting difficult. Price volatility will occur.

#2 Revenue/earnings change seen in price trends

As revenues and earnings rise, so will stock price. The same is true in the other direction; as revenues and earnings decline, stock prices are likely to fall as well.

#3 Market changes seen in financial results and in price breakouts

The market for an industry changes due to various economic reasons. This leads to price breakouts for companies within the industry.

For example, if a tech company is awaiting approval of a new patent, the stock price may anticipate that approval (or a denial). Prices will likely break out of predicted trading ranges.

The technical side may also contradict fundamental trends. There is a strong correlation between financial developments and market price. However, there is a time lag or even a predictive change on either side.

Here are some examples:

Seemingly predictable financials, but very volatile price trends

Fundamentals can appear stable, yet the have very volatile prices at the same time. This is usually driven by the undercurrents and news about a company. The news can suggest the change in the fundamentals, even though it will take time before they appear.

Price movement is usually supported by a valid reason. These reasons do not always appear in the fundamentals first, but the high price volatility may imply a trend that contradicts what the fundamentals are showing.

Highly volatile fundamental trends, but low price volatility.

A company can experience high fundamental volatility without a correspondingly volatile technical trend. A company may be expanding its product base, or even changing management. These factors cause fundamental volatility for up to three years.

When prices remain stable during such a period, it is likely the company is perceived as a strong long-term hold.

High earnings predictions but declining market price.

Sometimes a company predicts high earnings, but the price drops anyway. For experienced fundamental analysts, it signals more in-depth analysis of the financial report. When market price for a stock falls, demand for shares is dropping, meaning investors are losing faith in the company.

It also means that investors think the earnings predictions are overvalued. This contradiction should be carefully considered.

No obvious financial change, but sudden run-up or decline in stock price.

Market sentiment do not appear in financial reports. Also, the latest financial results are out of date if you want to make a decision today. So even when there are no news on the company and yet prices change drastically, it signals possible news or data to be revealed.

Under such situation, relying on historical financial information will be useless.

Review current news about the company. Find out why prices are changing (regardless of whether prices are moving up or down). Match technical changes to fundamentals. The causes will likely be published in the next financial report. But the technical signs will tell you that the change is already known. You only need to look for it.

Read Also: A Simple Technical Analysis Concept That Will Help Even Long Term Investors

Using Both Schools Of Thought

It is impractical to base every investment on one school of thought.

You can make good use of both fundamental and technical indicators. Market risk involves price and volatility. While some measurements are often inaccurate, they make an important point that fundamental investors cannot ignore volatility and stock price trends.

You may consider a range of both fundamental and technical indicators to follow. Picking a series of indicators shortlists stocks for you. It also isolates specific risk levels and growth candidates from the many companies in an industry.

While you are likely to select your favorite fundamental and technical indicators, consider the following list. These are straightforward, easy-to-follow trends. Also the information is easy to find on company websites, annual reports, financial statements, and brokerage sites:

Fundamental Indicators

  • Trend in revenues over many years
  • Gross profit margin
  • Net margin (based on core earnings)
  • Dividend yield (and consistency in increasing dividends annually)
  • Current ratio
  • Debt ratio

Combination Indicators

  • P/E ratio (based on core earnings per share)
  • P/S ratio (if company profits are inconsistent, or losses have been reported)

Technical Indicators

  • Trading range trends over the long term
  • Price high/low analysis and volatility (adjusted for spikes)

While these are by no means applicable to every situation, they can cover most of the concerns that investors normally have about risk on various levels.

Read Also: Paying 1% In Investment Fees Could Mean Giving Up To 1/3 Of Your Wealth

Top Image

Advertiser Message

Get The Latest Bite-sized Investment News, Ideas & Insights

It's free! Don't miss out on the latest financial market movements. FSMOne aims to help investors around the world invest globally and profitably, follow FSMOne’s Telegram for bite-sized finance analyses and exclusive happenings.