Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

A DISCONNECT BETWEEN TECHNICALS AND FUNDAMENTALS

It is very common for traders to unintentionally disregard one of the messages derived from fundamental or technical analysis. Quite often, in fact, the fundamentals can be strong and appear too good to be true, while the technical picture tells a different story. When guilty of using this tunnel vision, traders are usually in for a painful market lesson.

As discussed previously, there are limits to price sell-offs and surges. Fear and mania, when unleashed, can move markets beyond fundamental and technical expectations, but price equilibrium returns sooner or later. Often, this strands a massive out-of-balance segment of traders who try to feed their greed with one more bite and end up starving. This precise pivot point, when stock prices wake up and explode, is where small fortunes are made.

It is therefore important to be equally aware of both the fundamental condition as well as the technical. But no matter what the promise of fundamentals, it should always be trumped by the technical message of whether to trade or not to trade. Consider this quote from Dr. Alexander Elder in his book, Sell and Sell Short:

The key principle is to use fundamental information as an idea generator and technical studies as a trigger. The technical can either release you to pursue that trade or stop you from going any further.

No matter how good a fundamental story, if the technical factors do not confirm it, there is no trade. This rule applies to ...