When does some type of technical analysis become useful for the value investor? We have actually found in certain circumstances where charts are in fact quite useful to determine appropriate buying and selling times. Now before we have you all jumping out of your seats yelling at the computer monitor, please let us assure you we are both value investors at heart and will never deviate from our foundation. However, it is appropriate to use the features of technical analysis that could be potentially useful at times.
The most evident factor is the moving average of stocks which can help you in the short term signify an appropriate buying price and not overpay. Again, we are not talking about using the charts to determine if the stock is suitable. We rather contend the mere fact that a growing number of individuals and firms do use technical analysis for their stock selection and it would be foolish not to follow the volume and pick the stock at the best price.
An example is earlier this week I was speaking with Ben about a stock he was going to purchase for his portfolio here on ModernGraham. The conversation started about how it might be useful to look at the chart’s after you have decided on the stock that fits the value investing model. I remember that Ben looked at me very sheepishly and sputtered “I have sinned”, it is comical, but there is some truth in the option Ben contended with.
What I would suggest is the following: pick a stock that fits the Benjamin Graham/Warren Buffet/ your own model of selection, do the due diligence of research on the company making sure that there had not been any major news that could be affecting the stock, and before you pull the trigger to purchase look at a chart and see if the intra-day or even intra-week timing is opportune.
Again, I want to reinforce for the sake of Ben, the site, and I that we are not condoning technical analysis for the primary tool for stock selection. Rather, use it as a painter would use a different brush to better represent his artwork. Don’t give up that extra $1 or so in the stock price because you couldn’t wait an hour or day to purchase the stock. Keep the research the same, but add some more tools to your tool-belt.
Breakdown in the Nasdaq A/D line
There is a big breakdown here
Oversold and overbought reading on the market
and stocks,commodities with Vix and Williams
indicators.
Parabolic charts for manias.
In 1998 the A/D line for the DOW broke down. Only a few stocks drove the dow to new highs then it crashed.
# Posted by: Ellis at October 13, 2006 10:39 AM