Finding the best investment opportunity requires a strategy and mine has always begun with technical analysis. I keep my technical analysis simple. I want to buy a stock that has little downside risk and a high upside reward. If you click here you can see a case study that explains my technique.

You need to find a system that can make you money while avoiding too much risk. By focusing on stocks that have yet to make a significant move, you have done just that. Granted, it is harder to find those kinds of investments in a mature market environment. However, in an ageing market do you really want to chase stocks?

Once you find a system you need to stick with it. Many investors make the mistake of personalizing an investment or becoming too attached to a stock. This can go against your system and doing so will cloud your judgment on subsequent investments. A classic example of this was Microsoft. When I was an advisor at UBS I had a client that had a very large position in Microsoft, he had owned the shares (in his retirement account) since the time Microsoft went public. In December of 1999, after much discussion, I advised him to take profits. The stock had reached my price objective and since there was no tax consequences, it just made sense. The client agreed and I wrote a sell ticket the night before. Before entering the ticket I checked back with the client and he cancelled the order. He had personalized his investment, perhaps with good reason, the stock had been a huge success.


It’s been 14 years and the stock is still below the price it was at in December of 1999.

A “true” technician looks at nothing but the chart, he doesn’t look to economic data. His belief is that the price and volume movements of a stock are a reflection of the economic prospects for that company. I have found that it is useful to know some of the fundamentals as well. As a financial advisor I felt the need to be more than just a chart reader, I had all this fundamental research at my hands, so why not use it.

Knowing the company’s P/E ratio helps explain what the market may feel about the company’s prospects. It is good to know the external market conditions which may affect the success of the company and it’s useful knowing what events caused the company’s stock price to increase or decrease in the past. Earnings projections, book value all come into play. All of this fundamental information can offer confirmation and a reason to believe in the technical indicators. The more information you have about a stock the greater the likelihood of a successful investment.

When you use fundamental analysis with technical analysis you reduce the risk of making a bad investment decision. This is true if you are a long term investor, if you are a day trader, you don’t need the fundamentals.

So where do you go to get that fundamental information. One option is Morningstar, which provides information on mutual funds and individual stocks.


One of the benefits of using Morningstar is that you get the fundamentals without the broker attachment. I have found that brokerage houses rarely make early calls on stocks. An example of that would be Apple Computer.

The same client that didn’t sell Microsoft listened to my Apple Computer recommendation in 2001, despite no recommendation by my firm. Not sure when they gave it a buy recommendation since I left the business in 2002.


Pictures speak louder than words!

I’ll give you an example of some of the things that Morningstar is saying about two of my most recent ideas.

First, Market Vectors Gold Miners ETF (GDX)

“So, why own gold miners now after a history of epic waste, mismanagement, and, in some cases, fraud? First, the market has wised up to the sector’s deficiencies. Miners now trade at very low valuations. The irony is this near-death experience is the catalyst needed to set gold miners straight, to clean out incompetent managers and hire people who’ll focus on prudent capital allocation. Second, miners are now an attractive substitute for physical gold exposure. Finally, miners don’t actually have to provide exceptionally high returns to be worthwhile because their low correlation to conventional stocks and bonds mean they can improve a portfolio’s overall risk-adjusted return.”


Second, J. C. Penney (JCP)

“While we currently view J.C. Penney’s shares as undervalued, the turnaround is still quite uncertain and has plenty of risks, despite sequential sales improvement in the second quarter. The company’s cash burn will eventually have to be stemmed by a return to profitability, which includes a needed increase in sales if fixed costs are to leverage. Should sales turn positive by the beginning of 2014, we believe operating margins could eventually reach prior levels, but over a fairly long trajectory of five years.”


While they are not robust recommendations they at least confirm the upside that I’m looking for.. Both stocks have been beaten down, and with good reason. But just maybe things will be changing for the better, that is what I’m seeing.

Morningstar will provide you with a wealth of fundamental information and this I believe is important, even for a technician.

Incorporating fundamental analysis with technical analysis, while not essential, can make you feel a lot more comfortable in making your investment decisions.

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