The value investor argues that fundamental analysis is better. The trader argues that technical analysis is better. Which way is a novice investor to turn?
In the long run, the fundamentals may be better. But when it comes to short-term trading, I base most of my decisions on technical analysis, and then use sentiment analysis as a secondary driver.
If you are not familiar with technical analysis, the chart below is a good learning tool.
This is a chart of the FXI, the iShares FTSE/Xinhua China 25 fund, an ETF designed to be a barometer for the Chinese stock market. China has been a hot topic for investors for several years now, and with the tremendous upswing in the FXI, you can see why. However, as you can also see, the FXI has been declining over the past four months. This downswing has caused a downward-sloped trend line to form, which runs counter to the upward-sloped long-term trend line.
So what do you do with a chart like this? You wait. Wait to see which way the stock breaks before making a move. When two opposing forces converge, the pressure on the stock tends to build. Once the stock moves outside of one of those trend lines, it tends to result in a huge move in the direction of the break.[Ed. Note: Rick Pendergraft is a professional trader and market analyst. Rick teaches investors how to read chart patterns and how to take advantage of them in his new K.I.S.S. trading program. This program is a great way to earn and learn at the same time. Learn more here.]