Combining Technical and Fundamental

At the start of this series, we helped you discover the investment method you should follow. We then proceeded to outline the framework of these methods, i.e, of technical analysis and fundamental analysis.

Today, we wrap up this series by telling you how, in certain situations, you can combine the two to gather a more informed picture of the market and thus make better decisions.

The integration of Technical and Fundamental analaysis can be used in the following ways:

1) When to Invest
Let’s assume you’ve done your research, and identified under-valued stocks with extremely strong fundamentals. However, even if you’re investing for the long-term, it’s always a good idea to do some technical analysis to find out the time the price is likely to be the lowest in the short-term. After all, buy-in prices can never be good enough.

2) Tracking reactions to major events
Fundamental analysts follow the economic calendar very keenly. It’s a good idea to understand how the market reacts to different events, whether it is a quarterly earnings report or the release of economic data. History tends to repeat itself in the market, and investors can take advantage of a likely price movement.

3) What do other’s think?
For any investor, it’s always a good idea to keep an eye on the volume indicators to get an insight on what other investors think about the company. Volume is an important representative of the market sentiment, something no investor can afford to ignore.

4) Filtering out using fundamentals
Technical analysts can decrease their risk exposure by only trading amongst companies with solid fundamentals, reducing the chances of a sudden collapse. This can be vital when there’s a high risk involved, such as in futures and options trading

For example, this article brilliantly demonstrates how the analyst examined the energy sector to include BP and Marathon, and then examined all the technical data to define different possible investment approaches.

5) The complete picture
Both technical and fundamentals can be used to complement each other, to get a more complete picture on the state of the market.

For instance, in this wonderful piece, Julia Lee shows us how both technicals and fundamentals indicated that it was a wonderful time to invest in the market.

The fundamental indicators [P/E Ratio and Divident Yield] were backed up by the chart showing the 200 day moving average.

PE ratio of the All Ords from 1980 to early 2009
PE ratio of the All Ords from 1980 to early 2009

dividend yields peaked in early 2009
dividend yields peaked in early 2009

The 200 day moving average
The 200 day moving average

Technical and Fundamental investors have been at odds for decades, but the smart investor will use the best of both worlds to try and maximise his investment results. While true synergy between the two methods might be impossible, there are certainly ways for them to work together.