hyaocu zkuesoe…

Learn from my mistake. I was correct in my analysis of MSFT when it dropped below $23. It fell further to $20 (over 10% decline). However, I didn’t have the money handy then to buy the stock once it hit that level, and I never jumped back it. Poor me, I was busy making and losing money elsewhere.

You should note that MSFT managed to close well above $30 for the first time in over 4 years. That was a resistance level, and MSFT just broke through. It’s going to surge from here. Keep buying.

Sell at “Gathering Resistance”

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However, fundamentals aren’t all there is. Technical analysis has merit and can show you a lot about the short-term outlook of a “stock”. So if I’m ready to invest in a company, it’s not a bad idea to double-check on the technicals to make sure I’m not buying into a flaky moment in Mr. Market’s pricing cycle.

We’d like our readers to have access to all of the tools available to make investment decisions. That said, we might have put a disclaimer at the top of this post.

We’ve covered Microsoft’s fundamentals in earlier posts. You can find out more about that here:

http://www.investorgeeks.com/articles/2006/05/04/microsoft-is-now-the-time-to-buy/

Additionally, rigorous Fundamental Analysis is the only way to truly know if your company is a winner or loser. That being said, most of us, including myself don’t do fully rigorous Fundamentals. This is a sin, but we have to start somewhere.

Analyze the financials, read the 10-Ks, and listen to the conference calls. Yea, it’s a lot of work, but start with 3 industries in different sectors, become experts in them, and then start to branch out. You’ll find that you can homework much more efficiently within similar groups of industries because business models tend to be similar.

Technical analysis is extremely popular with the average private investor. Fundamental analysis is not. Why?

For many reasons;

Technical analysis uses fancy graphs and charts that give a good visual selling point.
Computer programs can produce interesting results.
Computer programs are used to pick up on repetitive past patterns.
Punters can glance at a chart and within seconds make ‘intelligent’ predictions.
No actual knowledge of what the company does is required.
Everyone feels they are an expert and share it with the world.

It’s like playing roulette. It’s a lot of fun trying to figure out a pattern like how may times the number 7 will come up and when!

Fundamental analysis uses boring spreadsheets.
Computer programs produce a boring result like a number for estimated earnings.
Computer programs are used to crunch numbers after extensive data input.
The average investor has no clue on how to read a balance sheet and doesn’t have the patience to learn. Or P&L statements are associated with accountants which in return is associated with taxes…not a pleasant thought.
Extensive detailed knowledge of the company and its competitors is required.
Expert analysts are afraid to talk, maybe they missed something.

It’s like sitting in a Library on a sunny day when all the rest of the boys and girls are out to play.

That’s it! Technical analysis is fun and fundamental analysis is boring!

Taking fundamental analysis and putting it into a neat ‘technical’ analysis package is the wave of the future. The long term result speaks for itself. Besides; it looks great, no one notices the difference and everyone is happy!

The truth be told, one should delve into technical analysis only after completing the fundamentals.

The psychology behind the suppourt and resistance levels is really interesting, and it can be pretty useful (especially with a stock that moved in the same channel for so long).

You touched on the idea of people wanting to close out profits at a breakeven, which led me to do a write up on my blog about overhead supply, something that is fairly common with stocks approaching former highs or bases. Good analysis, I would keep an eye out for the volume. If it hits the resistance and bounces on high volume, it may not be about to move out. But if it dies down, you could be near a break through.