Mike, who's looking to mix in some technical analysis (TA) with his fundamental analysis (FA), sent the following:
Just getting into "trading", having been "investing" longer term in value stocks for the last few years.
My value stock mentor (he has averaged over 17% per year for years and years) looks for solid companies that for a variety of factors are undervalued. Then he either buys stocks or frequently SELLS puts. He does not even glance at the charts. Once they get cheap he buys.
I've been trying to learn TA so once we find a stock which is seemingly undervalued I can see whether it is likely strong or weak and whether to buy at that point or wait. Anyway two of his favorites right now are HD and AIG. They are both fundamentally very cheap. But, I've been watching them fall and fall over the last 4 to 6 weeks. Was wondering if you could analyze them and even let me know when a reasonable Technical bottom could be expected.
I think it makes a whole lot of sense to use FA to find what to trade (invest in) and use TA to tell you when to initiate the trade. The trick will be finding the right indicators to use that suit you. I like to use moving averages to tell me if the trend is up or down and then look for trades in the direction of the trend. That may not work well with certain value situations. For example, there's no way I would have jumped in AIG after the thrashing it took in October because I would have been bucking the intermediate and long term trends (as defined by the 50 and 200-day moving averages respectively). It rallied about 33% from the October lows to the February highs. Anybody who bought into that October slide would have certainly been looking for a contrarian/counter-trend play so using moving averages wouldn't have made much sense. Perhaps some kind of extreme oversold indicator works in those type of situations?
Having said all of that, here's my take on AIG and HD. Starting with AIG, the obvious thing that pops out on the chart is that it's almost back to the October lows. I'd expect traders to be looking for a double bottom to form. If you just have to be in AIG watch for a bounce off of the $55 area.
Home Depot looks a bit better than AIG to me. It looked even better two days ago before it broke down under its 200-day moving average. That moving average typically draws the interest of long-term investors so if you're looking for a long-term play in HD the 200 DMA might be a good place to enter.
An ideal book to help you with technical analysis while using your fundemtal approach would be..."Finding Winners among Depressed and Low-Priced Stocks" written by Richard L Evans...No one talks about this book much but it is one of the best and accessable books about straight forward TA...
the way I see it anyway....Gavin
Thanks for the tip Gavin. I hadn't heard of that book.