Next, we also use technical analysis to look for buy points in specific issues. Again, it’s our firm belief that fundamental analysis can and should be used in combination with technical analysis. Fundamental analysis is typically the method by which we “kick the tires” of a company while technical analysis will be the tool we use to time our entry and locate key sector rotations. A pure technician would tell you that the chart will tell you what the fundamentals are doing and to some extent we believe this to be true. However, we base all of our investment decisions on a combination of both schools of study.
Take a look at the chart below to see an example of how we might use technical analysis to direct us to an entry point for an issue that we’ve already qualified from the fundamental side. The chart below is for Wells Fargo Company (WFC), a super regional bank. From looking at the chart, it is evident that WFC was in a down trend from late 2000 to late 2001. During this time frame, many analysts came out in defense of the stock and we saw a slew of upgrades in 2001 (I’m sure your opinion of analysts and their upgrades is similar to ours). However, even in the face of those upgrades and estimate hikes, the stock continued to fall. Understand, during this time frame, we also believed the stock offered upside. However, the stock continued lower as Institutions and short sellers, in a bad market continued to distribute the issue. In late 2001 something changed. The stock broke thru its descending line of resistance and thus broke out of its yearlong downtrend. This was the time to buy into WFC. The fundamentals were dramatically improving, the trend had changed and institutions were coming in on the buy side. This is where technical analysis will assist us in entering an equity position or sector.