Combining technical and fundamental analysis can yield powerful account building returns when trading and investing in stocks. Many books though seem to treat technical and fundamental analysis as two completely separate camps in which you have to decide which one to be in. You're either a technical trader in which timing the market with chart patterns and setups is the status quo or you're a fundamental investor where you're supposed to spend a ton of time looking at earnings to figure out if a stock is undervalued compared to its book value. Can you say boring...
So what I'd thought I do with this article is show you how to simply combine both technical and fundamental analysis to get big returns in short order.
I'm going to go over a recent trade that gave my subscribers and I a 30%+ gain in just 30 days by combining both technical and fundamental analysis.
Charting the Fundamentals
In the weekly episode of Stock Market Pulse Tv on December 4th, I covered the overall stock market and what to expect heading in to the holidays post election. I highlighted several stocks in this episode. One of which was Ceragon Networks, ticket CRNT.
Let's start with the fundamentals of this company. There are several tools out there to help find stocks with good fundamentals. The tool I've been using though is Vector Vest because I love the way I'm able to graph or chart the fundamentals of the stock similar other technical indicators. By the way, I am not affiliated with Vector Vest in any way as of this writing. I simply really like the program for quickly finding stocks with good fundamentals.
So let's take a look at what I'm talking about. Here's what the chart of Ceragon Networks, ticker CRNT, looks like inside Vector Vest.
As you can see below we have the typical price candlesticks on the chart. In addition to price I've added two fundamental indicators if you will. The green line is the Value Line which represents what Vector Vest thinks the value of the stock is or could be over the next year or so. I don't know that exact calculation or time frame for how they determine this number but I have noticed that the value line tends to fall in line with Earnings Per Share or EPS. You can see below the price chart that I've added the EPS and over all, as EPS rises the value of the stock rises as well. Makes sense right?
So from a fundamental perspective, CRNT has rising Earnings Per Share and is considered undervalued within the Vector Vest program. Great, let's keep going.
Simple Technical Analysis
Now that we have a stock with strong fundamentals, let's perform some technical analysis to find an entry for a trade. For this, I'm switching over to Think or Swim from TD Ameritrade which is my preferred trading platform at the time of this writing.
One of my favorite ways getting into an undervalued stock with strong fundamentals is by looking for a low ADX reading, at least below 20. Real quick, the ADX is part of the Directional Movement Index which indicates the strength of a trend. So a high ADX reading would be a strong trend and low ADX reading would no trend at all. When trending with a high reading, the ADX won't tell you if the trend is up or down only that it is strong. You would then have to simply look at the chart to see which way it is trending. Here's a full article on the Directional Movement Index for more info.
So on the chart of CRNT below, I've added the ADX which is the red line. At Point 1 on the chart, the ADX broke below the 20 level indicating a lack of trend. You'll also notice a couple days later they were due to announce earnings so even though the ADX was headed lower, this is not the time to buy. After earnings the stock popped but then faded as we were in the heat of the 2016 Clinton/Trump election. At this point with my subscribers of Stock Market Pulse TV, we were in a holding pattern to see how the election played out but had been discussing CRNT in the weekly videos. It was solidly on the radar.
Once the election was over the ADX of CRNT continued to move lower and got down to below 12. This is an extremely low ADX level for any stock but even though the ADX was low, the stock was not making new lows. This was telling me that bears had no conviction and why should they? The overall market was moving higher, EPS for Ceragon was increasing, and the stock is severely undervalued. Also if you look back at Point 2, there was a similar scenario where we had an extremely low ADX reading as the stock traded sideways and look what it did after that. Boom!
This is the perfect combination of fundamental analysis and technical analysis I look for to make a high probability trade. So in the weekly video at Point 3, I recommended to my subscribers to consider getting into CRNT the next week. I personally entered the trade on Tuesday December 6th at a price of $2.29. As of this writing the stock is well over $3 which is over a 30% in 30 days for my subscribers and I.
At this point, the plan is to raise stops and possibly scale out. Don't want to be a pig at the trough.
Combining fundamental and technical analysis can give you some of the most high probability, account boosting trades which I share in each weekly episode of Stock Market Pulse TV.
I'd like to invite you to join me risk free each week as we look at the overall market and reveal other stocks like CRNT that have both strong fundamentals and technicals going for them.
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