Price momentum vs earning forecasts

Discussion in 'Stocks' started by johnborntrader, Feb 26, 2010.

  1. I know the term "momentum investment" for technical anlysis, "valuation" for fundmental analysis. However, I bumped to a website at which basicaly invests when price is ahead of earning forecasts. It claims doing well.

    It is counter intuitive. Does anyone think it is possible to combine technical analysis and fundmental analysis? How?
  2. Some technical analysis methods combine well with fundamental analysis to provide additional information to investors. These include:

    1) Volume Trends
    When an analyst or an investor is researching a stock, it's good to know what other investors think about it. After all, they might have some additional insight into the company or they might be creating a trend.

    One of the most popular methods for gauging market sentiment is to take a look at the recently traded volume. Large spikes suggest that the stock has garnered much attention from the trading community and that the shares are under either accumulation or distribution.

    Volume indicators are popular tools among traders because they can help confirm whether other investors agree with your perspective on a security. Traders generally watch for the volume to increase as an identified trend gains momentum. A sudden decrease in volume can suggest that traders are losing interest and that a reversal may be on its way. (To learn more, read Gauging The Market's Psychological State.)

    Intraday charting is growing in popularity because it enables traders to watch for spikes in volume, which often correspond with block trades and can be extremely helpful in deciphering exactly when large institutions are trading. (For more on this subject, see Volume Oscillator Confirms Price Movements and The Pros And Cons Of Institutional Ownership.)

    2) Tracking Short-Term Movements
    While many fundamental investors tend to focus on the long haul, the odds are that they still want to obtain a favorable buy-in price and/or a favorable selling price upon liquidating a position. Technical analysis can be handy in these situations as well.

    More specifically, when a stock punches through its 15- and/or 21-day moving average (either to the upside or the downside), it usually continues along that trend for a short period of time. In other words, it is largely an indicator of what to expect in the coming term. Incidentally, 50- and 200-day moving averages are often used by chartists and some fundamental investors to determine longer term breakout patterns. (To read more about how to interpret these indicators, see our Moving Averages tutorial.)

    For those looking to time a trade or to solidify a favorable entry or exit price in a given stock, these types of charts and analyses are invaluable.

    3) Tracking Reactions Over Time
    Many fundamental analysts will look at a chart of a specific stock, industry, index or market to determine how that entity has performed over time when certain types of news (such as positive earnings or economic data) has been released.

    Patterns have a tendency to repeat themselves, and the investors who were lured (or put off by) the news in question tend to react in a similar manner over time.

    For example, if you take a look at the charts of various housing stocks, you'll often see that they react negatively when the Federal Reserve chooses to forgo a cut in interest rates. Or check out how home improvement stores tend to react when reports of new and existing home sales decline. The reactive move lower is pretty consistent each time.

    In short, by analyzing historical trends, investors can ballpark the possible reaction to a future event.

    The information provided came from investopedia.