It was silent as I was studying the action of the market on several monitors in front of me. Suddenly, the room erupted in a swell of voices screaming at me.
"Marc, load to buy Softee (Microsoft) at 24 5/8."
"Buy Read-Rite at 17 3/4. NOW!
"Marc, do you have a better price on Instinet for Qualcomm?"
"Buy it! (Microsoft)"
"Cancel Read-Rite. CANCEL! CANCEL!"
"Where's my f&%#@ing fill on Softee?!!!"
That was a typical day on the trading desk where I started my career as an assistant, executing orders for the traders. I eventually worked my way up to join them in shouting orders to an assistant (although I was always nice about it). But it was those early days where I first started my education about the markets.
I watched the tape, studied the markets and looked for any edge I could find that might help the traders I worked for.
For several years, I studied technical analysis (how to read stock charts and indicators). While I was repeatedly reminded that technical analysis is not a crystal ball, I knew better. I would find some method that would lead me to endless profits. I didn't care what business the companies I studied and traded were in, they were simply ticker symbols that rose or fell in price.
I was so engrossed in the study of charts that I became the Vice President of the Technical Analysts Association of San Francisco, published papers on chart patterns and interviewed nearly every prominent technician of the day.
I still hadn't found the "secret formula" for my guaranteed profit stream, although I was sharpening my skills as a chart reader with increasing success.
I'm not sure when it happened. There was no "Aha!" moment that I can recall, but eventually it dawned on me that understanding a company's financials would be an important component of analysis.
I already knew how to read financial statements, but I began to study them even more. Soon, I found myself working as an analyst focusing exclusively on fundamentals.
One day, I was surprised when my boss, the director of research, came into my office and sat down. He never came into our offices -- we always were beckoned to his.
"Marc, would you be interested in starting a technical research department?"
The idea excited me. But I had just spent the past three months studying harder than I ever had in my life for the Series 86, the exam that all sell side analysts need to pass before they are allowed to publish reports. While FINRA (Financial Industry Regulatory Authority) doesn't announce the pass/fail rate, from what I have seen with my own eyes, more than 50% of test takers failed. Fortunately, I was in the minority.
From then on, I published both technical and fundamental research. My goal every day was to find great companies with sound financials and prospects, and use the charts as a timing tool to enter positions.
And that's what I've been doing ever since.
Reaching Across the Aisle
For many fundamental and technical analysts, asking them to combine methodologies is like asking Representatives Nancy Pelosi and John Boehner to work together on middle of the road policies. It's not going to happen, even though it would probably produce the best solutions to our problems.
Same thing in the market. Selecting great companies whose charts suggest higher prices (or shorting bad companies with weak looking charts), should produce excellent results as you're increasing the likelihood of success by using two strategies.
So I screened for companies with solid financials based on several metrics including cash flow growth, book value growth and low debt, and took a look at their charts to see if any had reasons to get in now.
Here are a few that caught my eye.
Zygo Corp. (Nasdaq: ZIGO) -- The scientific instrument maker has seen cash flow increase 81% over the past four quarters from the previous four. After a two year decline, its book value is on the rise and the company has an outstanding balance sheet with $64 million in cash and no debt.
When you take a look at its chart, the stock looks rarin' to go...
The stock looks to be breaking out of what is known as a cup and handle formation. That is when a stock drops and rebounds, making the cup. Then it trades sideways for a little while, which forms the handle. If it breaks above the high of the handle, it has a very good chance of continuing higher. The cup and handle is a fairly reliable pattern.
So a quick view of the fundamentals tell us it looks like a strong company and the chart tells us the timing is right to get involved.
Let's take a look at another...
Harman International (NYSE: HAR) makes high-end audio equipment. Free cash flow was negative (barely) in 2009, $180 million in 2010 and $223 million in 2011. While the company has some debt that is due this year, it has more than enough cash on hand to cover it. Book value grew 23% in 2011.
And when we study the chart, there is a lot to like:
Harman appears to be breaking out of a W pattern. A W pattern looks like, well, a W. You can see the first leg down of the W in early August followed by a rally into the end of the month. A second decline in September bottomed in early October and the stock immediately rallied back near the previous high, completing the W pattern. It also looks like a cup and saucer with a long handle from November until February.
A W pattern has a measurement component to it. You take the peak price on the left side, subtract the price at the bottom and add it back to the breakout price. So roughly speaking, it's $46 - $26 = $20. $20 + $46 = $66. So we would expect Harman to eventually reach $66.
Another item giving us confidence is the golden cross, something that Chris explained wonderfully in
a recent article. That's when a shorter term moving average crosses over a longer term moving average to the upside. In this case, the 50 day moving average (blue line) crossed over the 200 day moving average (red line). This indicates the near term trend is up.
There is some resistance in the $52.50 - $53.50 range, as that's the area where the stock topped out this year and in 2009. Resistance is a price level where a stock has historically had a difficult time climbing through. Once it does break through resistance, that level becomes support, which is an area that a stock often does not fall below.
If you're interested in these two names, be sure to conduct your own research, as I only took a rudimentary look at them based on the stock screen.
Finding great companies sometimes isn't enough to make money in the market. You need to have the right timing as well. Combining technical analysis and fundamental research can help you achieve both.