Editor’s note: This article was first published in March 2013, and its prices and chart levels are from early March 2013: Pescanova, Telefónica and Inditex. Inditex split its shares 5-for-1 in 2014, so its figures are not comparable with later prices. Pescanova’s later accounting scandal and insolvency are not reflected.
To start with, before choosing between technical analysis and fundamental analysis, we need to know whether we plan to invest for the long term or whether, on the contrary, we’re looking to make money in the short term (speculate). As I explained in a previous article, it’s good to know technical analysis, especially for choosing the right moment to buy, and at some point it may even warn us of trouble ahead for a stock.
Technical analysis isn’t an exact science, but since more and more investors follow it, it’s worth bearing in mind. If your plan is to invest for the long term, forget about technical analysis altogether and invest solely on the conclusions you draw from the company’s fundamentals (balance sheet, accounts, debt, potential…) AND THE MACRO PICTURE.
Example: with a stock trading at around €5 in a clear downtrend, we’ll often have heard people say: “I wouldn’t take a position in this stock until it breaks through its resistance at €6.40.” In other words, once the share price clears €6.40 convincingly, they’ll tell us: “Possible trend reversal in the stock. Now I’d buy in.” Thanks a lot! We’ve just missed out on a 30% gain. Let’s use three specific companies, and what their charts were showing, to explain why technical analysis has to be combined with fundamentals. Or rather, I’d say fundamentals come first, and once I’ve decided to buy, that’s when we look at the chart and its technical patterns.
Pescanova
Pescanova was coming off a steep downtrend, made worse by that famous red weekly candle that took the stock from €20 down to the €14 area in three days. It was now starting to form an upward channel, again targeting the €20 area, its first resistance, which, if broken, could send it even higher. Accumulation levels were good and its trading volume had risen considerably (gains accompanied by volume). In other words, a clear uptrend, no doubt about it.
Pescanova woke up suspended from trading, apparently because it has filed for pre-insolvency proceedings. So: technically bullish, and on fundamentals practically bankrupt. In the end, fundamentals rule, and in the long run they completely invalidate technical analysis.
Telefónica
Telefónica is another curious case: when it was trading around €8, the advice was to sell. Now that it has passed €10, Goldman Sachs tells us to buy. Of course, Telefónica isn’t a company I’d hold for the long term. Not even for the dividends, because I think the worst thing this company can do, with its level of debt, is pay dividends, even though its results have been apparently positive. Look into the details and they actually show a worrying trend. It’s not that Telefónica is going to close, but little by little it will lose market share to its competitors. Or maybe not, but simply having these doubts makes Telefónica one of the likely rejects for my investment portfolio. On top of that, it’s a stock with plenty of resistance levels in its way, which doesn’t mean it won’t get past them, but…
Inditex
With Inditex I see the opposite case to Pescanova: while Pescanova had a clear uptrend and is an almost bankrupt company, Inditex is still at the top of a downward channel and yet it’s a great company. Technically, the chart tells us that if it doesn’t break through the top of the channel, there’s a good chance it will head towards the bottom, with a target of €95, and if that breaks, a visit to the €85 area can’t be ruled out. On fundamentals, on the other hand, we’ll probably see this company above €130.
In short: technical analysis is ideal for traders or weekly trading. For anything beyond that, such as investing in a company, we analyse the only reliable indicator (the fundamentals, or expected potential) and then take a look at the chart, in case there’s a chance to buy the shares more cheaply while they’re technically bearish.
Further reading
- 5 technical analysis books for beginners
- Lessons from the few investors who beat the market
- 5 steps to building a dividend investing strategy
Featured image: HombreDHojalata, CC BY-SA 3.0, via Wikimedia Commons.
