Best Thread How do technical traders fit into the greater scheme of things?

Capital growth (the increasing value of your stock) is independent of dividends. Dividend is income.

I was under the impression that an asset price is set to the total projected income from that asset in the future. Therefore two shares all equal except dividend (if that's at all possible!) will be priced differently, the higher yielder being at a higher price.
 
Appreciate the comments. But i am actually an entirely technical trader in fact maybe the most technical of technical in the sense i trade black box systems professionally. I use no discretion or personal opinion.
I am just playing devils advocate for the purpose of this thread. I make money by analysing when the market is moving in a particular fashion and exploiting that. But i believe the only reason why the market moves in that fashion is because fundamentals are a catalyst for "smart money" to start exploiting the fundamental situation i.e interest rates rise so people buy that currency which causes a rise in a dollar which causes my system to buy the dollar.

However i don't believe my approach to trading is anything more than a nusance to the market in the greater scheme of things. If everyone had my approach to trading the markets would be meaningless as i just react to price, without caring why its moving. Traders like me just exagerate fundamental moves. But i believe without fundamentals moving the market for me traders like me wouldnt exist. I think by realising the fundamental picture you can start moving into a position and the technical guys strat to follow as i believe they are reactionary and come second to fundamentals.

Tommog and TWI and JOC and their sympathizers have it. I particularly like the comment above: "traders like me just exaggerate fundamental moves". Markets don't turn because somebody's simple/exponential/weighted 50 crossed their simple/exponential/weighted 200 (or 150 or 100 or whatever). The MAs cross and the other indicators provide their "signals" because the market has already turned. And the market turns because the boys with the bucks have determined that prices are close to correlating with what they have found to be fundamental value (or, in the opposite case, prices are far beyond correlating with what the fundamentalists perceive to be fundamental value). Dow gave the best and clearest explanation of the process and when and how and why fundamentalists decide that now is the time to buy (or sell). Technicians look for these signals, either through indicators or price movement, and add what they have to the effort. But they don't initiate it. They don't have the muscle.

Going back to the example of NR, one would have to research all the releases which were provided long before the dam broke, and, even then, there would be much information not available to the public. But it is naive to believe that not a single executive caught any whiff of trouble until the technicians began to sell. There is a whole world of information-sharing to which even a professional money manager is not privy, much less the amateur trader who operates from his home, or from his office during his lunch hour. But the alert trader can detect these clues through traditional patterns, e.g., double tops and bottoms, heads and shoulders, accumulation and distribution markers and make a profit with his two cents.

Db
 
The MAs cross and the other indicators provide their "signals" because the market has already turned. And the market turns because the boys with the bucks have determined that prices are close to correlating with what they have found to be fundamental value (or, in the opposite case, prices are far beyond correlating with what the fundamentalists perceive to be fundamental value). Dow gave the best and clearest explanation of the process and when and how and why fundamentalists decide that now is the time to buy (or sell). Technicians look for these signals, either through indicators or price movement, and add what they have to the effort. But they don't initiate it. They don't have the muscle.

I think that is spot on

EDIT.
But where would we be without the fundamentals kicking in first? Technicians would be just stumbling around in the dark looking for reasons to (in my view) take a gamble
 
I think that is spot on

EDIT.
But where would we be without the fundamentals kicking in first? Technicians would be just stumbling around in the dark looking for reasons to (in my view) take a gamble

It's (funnymentals) already in the price:rolleyes:
 
I use a technical system that looks for certain bollinger band/channel deviation/configurations with oscillator divergence/extremes.

Whilst I accept this is an intraday move, can anyone explain what fundamentally changed for market participants to start selling gbpusd today at 0361 area on the run up from todays lows at 0245 area,

-or-

did the technical situation precipate the sell orders, ie the resistance of the 1hr res t/line, the 50% fib of the weerkly fall from 0474, Wkly camarilla L3 pivot area, and some previous Dly Hi/Lo areas. ....... highlighted by oscillator divergence on the 1min chart and overbought oscillator extremes on the 5, 15 and 30min chart

??
 
I use a technical system that looks for certain bollinger band/channel deviation/configurations with oscillator divergence/extremes.

Whilst I accept this is an intraday move, can anyone explain what fundamentally changed for market participants to start selling gbpusd today at 0361 area on the run up from todays lows at 0245 area,

-or-

did the technical situation precipate the sell orders, ie the resistance of the 1hr res t/line, the 50% fib of the weerkly fall from 0474, Wkly camarilla L3 pivot area, and some previous Dly Hi/Lo areas. ....... highlighted by oscillator divergence on the 1min chart and overbought oscillator extremes on the 5, 15 and 30min chart

??

Those of you who think that fundamentalists bother with these day to day burps, much less minute to minute, don't understand how fundamentalists operate. The technicians may play with each other until they exhaust themselves, but the fundamentalists are somewhere else.

Db
 
For the first 3 years of my trading career I did not look at a single chart but still managed a trading business generating GBP7m p.a. Of all the volume traded there were hundreds of thousands of lots of business put through as futures but the business was a physical one. Buying cheap enough in one country that I could sell it somewhere else and make a margin. It is a very different approach to technical trading and the absolute price is less important than the spread and the margin and the economy of scale.
 
Jack o Clubs: If technical analysts know the price of everything and the value of nothing, then we are in good company. Value is not absolute it is perceived whereas price is absolute. So when I enter the market based on certain tech indicator patterns at areas that the market has turned before, or areas where there is evidence to suggest it may do so again, ie at technical areas of support or resistance, I do so not caring wether the instrument is actually over or under valued at that price, because what I know is that if I get the right set-up there exists a greater probability than not that price will move my way, without having to have' yet another opinion' within the market about whether that price represents value. Tech analysts know that price at any level accompanied by evidence of support/resistance and a repeatable pattern of tech indicators/price action reperesent only one thing: an opportunity to play their trading edge, whether the market is actually over or under valued, (and before any techies jump down my throat, Lol I don't mean overbought or oversold which are entirely technical phenomenons.)

dbphoenix: Whilst overall I accept that it is probably the larger 'market moving' market participants perception of value that drives the overall long term direction of the market, there is much evidence to suggest that the oscillation of the market within that is partly based on technical factors. Furthermore trend is an entirely technical phenomenon, and any directional drive in prices is assisted by the technical 'trend followers.' Certainly for my own part, trading a small time frame intraday system/methodology, I rely on technical factors to give me such a trading edge.
 
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dbphoenix: Whilst overall I accept that it is probably the larger 'market moving' market participants perception of value that drives the overall long term direction of the market, there is much evidence to suggest that the oscillation of the market within that is partly based on technical factors. Furthermore trend is an entirely technical phenomenon, and any directional drive in prices is assisted by the technical 'trend followers.' Certainly for my own part, trading a small time frame intraday system/methodology, I rely on technical factors to give me such a trading edge.

No one is claiming that this is an either/or condition. The OP had to do with the relationship between fundamentals and technicals. While one may choose to trade using one or the other, neither is absolutely superior.

Trend, however, is not "an entirely technical phenomenon", though one could argue that pace and momentum are. Fundamentalists buy and pyramid in large part due to earnings and earnings improvements. They do not buy because the red line crossed the blue line.

Db
 
... Furthermore trend is an entirely technical phenomenon, ...

I have to disagree with this. Trend is nothing more than an expression of traders translating their perceptions into transactions in the market. Those perceptions may be technically driven or fundamentally or any number of other things, but the sustained directional price action over time which is trend is simply more money acting in that direction than acting in the opposite.

If you want to try to make the fundamentals don't make trends, then think first about a stock. When earnings trend higher they (theoretically) increase perceived value overtime, which translates in to a trend higher in price.
 
is it me or are we going round in circles, lol (interesting discussion though.)
 
Years ago, I was a major participant in the CANSLIM board at The Motley Fool (back when I still fiddled with stocks). In March '01, I made a series of posts on The Gorilla Game board for the purpose of (a) explaining how technical analysis differed from fundamental analysis and to point out some of the sins committed by both camps; (b) noting the three chief divisions of technical analysis; and (c) explaining the difference between valuing a stock and valuing a company. I've combined those posts in what I hope is a not too clumsy way and copied them here (I saved them all because this subject comes up with some regularity). To anyone who's approaching this for the first time, these points may provide some small degree of light on the path.

Db


A spreadsheet is a record of a company's financial behavior. It may be restated into a P&L or an income statement or whatever, but it usually begins as a spreadsheet. It tells you (or at least is supposed to tell you) where the money is coming from, where it's going, what management is doing with it, how it's being husbanded. A good detective, often an accountant, can tell you with impressive accuracy just what's going on in that company by tracking the flow of money hither and yon.

A chart is a record of a stock's price behavior or, more accurately, the behavior of those who are interested in buying or selling the stock. It tells you who's interested in buying it, how many buyers there are, what price they're willing to pay (there have been many reasons advanced for the collapse of the Nasdaq in 2000, but the chief reason for the collapse was simply that the market ran out of people dumb enough to pay those prices; when the selling began, there were no buyers left on the field). It also tells you the same things about whatever sellers there may be in the house. But rather than do it with cells in a spreadsheet, it does it with a bar showing the opening price for the day and the low, high, and closing prices for the day. Combined with the number of shares traded and a knowledge of the psychological and sociological significance of the relationships of these elements to each other, one can reach some pretty accurate conclusions about demand and supply. And since demand is what makes the price go up, this is worth knowing.

That, in its simplest form, is what a chart does and it is all that many chartists care about, including those who are interested in the CANSLIM strategy. Quite a few chartists, however, go beyond this into patterns. Even CANSLIM urges the investor to become familiar with the most common and most productive patterns, such as a flat base. But the pattern people, unfortunately, go far beyond those simple patterns which have demonstrable psychological importance and sail into the realm of what is often silly. Since the predictive validity of many of the more esoteric patterns is debatable at best, discussions of them alienate many investors who might otherwise gain valuable insights into how markets behave through an understanding of basic charting.

But the third element of charting - that of technical analysis and the use of "indicators" - is where the unwary beginner is pulled through the looking glass and is either persuaded that all he has to do to attain quick and easy wealth is to become expert in the use of RSI, MACD, MFI, OBV, IRT and QED, or is confused so thoroughly with all this that he becomes convinced that anything having to do with charting in any way whatsoever is just so much hokum and not worth the attention of the serious student of markets and investing.

Hokum, however, is not the sole province of the technician. Fundamentalists must share in this guilt to at least some degree. Those with long memories will remember that, at one time, investors flocked to equities for the dividends, their way of sharing in the profits of the companies which they had selected. For reasons with which you are all familiar, dividends dropped to the bottom of the list as criteria for investment. Investors wanted growth, and growth companies rarely pay dividends. Rather they put that money back into the company to fuel further growth. Therefore earnings, not dividends, became the touchstone.

The problem with earnings, however, was that they became much too important and eventually became far too easily manipulated (the infamous "beat expectations by a penny"). "Whisper numbers" became a hastily and crudely fashioned tool to get at the meat of the earnings numbers, but were doomed to failure. Now with basic, non-basic, diluted, undiluted, before extraordinary items, after extraordinary items, blah blah blah, even the experts have difficulty determining what the earnings are. So to revenues and the PSR.

But even the use of revenues has not been clear sailing since creative accounting apparently has no bounds. Many companies consider orders to be revenue and book revenues long before the cash is actually in hand. And what if the company is young and hungry and aggressive? What if it is more concerned with market share than with pleasing the accounting fraternity? Is this not the crucible from which gorillas are ultimately forged? Hence the PVR or Price to Vision Ratio.

When it comes to bizarre forms of reasoning, fundamentalists have as much to answer for as technicians.

I encourage anyone who has been turned off by charts - or who has been turned off to charts by others - to look at them again with a fresh viewpoint as records of transactions, not as mysterious petroglyphs whose meaning can only be determined through the tossing of chicken bones and the waving of rattles. Even the so-called Long Term Buy & Hold investor would do well to keep an open mind to the possible value of charts for a number of reasons:

One, valuing a company and valuing a stock are two entirely different processes. Whatever valuation methods you choose for one may be completely inappropriate for the other. Determine first your reasons for buying the stock and the choice of valuation method might be more easily made. If you have determined your reasons for buying a share in the company and found them to be compelling, you may yet find that the price of that share is currently beyond all reason.

Two, even the very best companies have variable growth patterns and growth curves. Many stocks have recently had parabolic rises followed by declines that even the word "plummet" fails adequately to describe. CANSLIM, the Gorilla Game, and similar approaches are designed to help the investor avoid these traps and focus on those companies that will do well over the long term. But over that long term there will be periods of hypergrowth, periods of seeming stagnation, periods of tentativeness, periods of decline. Throughout these periods it is critical to remember the difference between the company and its stock. Whether one wants to participate in the declining periods as well as the hypergrowth periods is a matter of personal choice, but the "long-term" investor should not assume that the slope will be ever upward without pause, and those pauses can sometimes last for years.

Three, market and stock timing are not impossible, no matter what you've heard. They are difficult and time-consuming, but not impossible. Most people don't want to mess with the process and rightly so. It's a job in itself - but no more difficult than learning how to do a thorough fundamental analysis - and should not be attempted by anyone who is not suited to it.

Four, if nothing else, a chart tells you what value buyers and sellers have agreed upon at a particular point in time regarding a particular stock. This point in time can be a minute, hour, day, or year, but during that period this is what the "market" has decided that the stock is worth. However, this need not have anything to do with the value of the company. Your belief that the stock is worth more will not budge the price one iota.

Five, many "long-term" investors avoid companies like AMAT because they are "cyclical". However, all stocks are cyclical in their own way, particularly if they follow the group, sector, sub-market and market cycles of which they are necessarily a part. Those who want to take the time and effort to understand these cycles can sell near the tops of these cycles, providing themselves with the extra cash to buy back the same stocks in the same companies when those stocks reach the bottoms of their cycles. Those who don't want to fool with it certainly don't have to, but one should take care to avoid the "it's not in the Bible so it's not allowed" point of view. If nothing else, even a superficial understanding of the stories which charts tell will prevent the novice from buying stocks at overextended levels, watching them sink, and remaining underwater for months or even years before getting back to a breakeven point.

Valuation is complicated and cannot be applied to company and stock alike without running into a lot of head-banging, and valuing the company and the stock separately through fundamentals on the one hand and the chart on the other won't necessarily make reconciliation any easier or faster. But by incorporating both fundamentals and technicals into your valuation and selection process, you will at least have a clearer focus of your opinion of the value of the company and of the market's opinion of the value of the stock and be able to arrive at a more reasonable and rational determination of the best entry point into the stock you want to buy or the best point at which to buy more of what you already have.

March '01
 
On the basis of DB's previous post, here is an example of the manipulations engaged in by BHP....ostensibly a Blue Chip investment security.

I originally posted this on the 28/August on a different forum;

BHP released their financials early last week. Having now had a chance to read through them in-between Jury service, there are some interesting things going on.

BHP have two separate share repurchase programs that have currently been announced. The August program, a $3.0B program, is more or less complete now.

142Million common shares were repurchased at a cost of $2.957B or circa $20.82/share. Does this represent management’s assessment of value?
Ignoring whether this was good value or not, the allocation of cash-flow went;
$286M………………………….Share Capital
$2.559B……………………….Retained Earnings

So, we can count these earnings twice?
The first time, the earnings are earned via Revenue, flow through the Income Statement, ending up on the bottom line as Net Profit.

That Net Profit if not paid out in dividends, would then rightly be recorded as Retained Earnings.

However, that is not what happened.

Assuming cash was paid for the share repurchase program, out of Net Profit, the shares were repurchased, placed in the Treasury, awaiting cancellation. [Previous Treasury shares have been retired]

Meanwhile, the cash used for the purchase has been recorded as….Retained Earnings. At this point we have the same cash showing up in three different places;
*Net Profit [Retained Earnings]
*Treasury shares [Share repurchase]
*Retained Earnings [Share Repurchase via Treasury shares]

Now, if the shares are not retired [cancelled] and are stored in the Treasury, they should not be recorded under Retained Earnings, they however remain an asset that can be resold. Should this happen, then the proceeds will be recorded under Financing Cashflows, and the proceeds placed in Current Assets as cash.

If the shares are retired, then, the asset is destroyed, in effect, a Return of Capital.
The advantages of this strategy is that future earnings are divided over a smaller share base, thus earnings per share will rise.

In either case, these are not retained earnings.
Currently BHP are counting their earnings three times…a little optimistic.

Earnings were also reported without including “Exceptional Items”.
Exceptional Items totaled……………………………………. $259M
Not an insignificant sum. The general rule is, are the items normal business?
In the case of BHP I would say that they are, thus they should be included.
They were;
*Impairment of South African Coal operations
*Newcastle steelworks rehabilitation [maintenance]

Capitalised Interest……………………………………………$353M
This one is a disgrace. Capitalising interest boosts net earnings. With a company claiming such a successful earnings period, capitalising interest is particularly egregious.

Taxes.
BHP have been utilising Tax Loss carryforwards to reduce Taxable income [no figure supplied]
This company has lost money?

Deferred Taxes……………………….+53.6%
BHP has accelerated depletion for tax purposes. In a resource business this is important. If you purchase on the basis of shareholder figures, you are guaranteed to overpay by the Deferred Tax figure. Again, simply a ploy to boost per share earnings by subterfuge.

Revenues/Inventories/Receivables.
So if we take Revenues of $47.47 and subtract the contribution made by higher prices we come to $40.37 Billion which is a 3.2% increase in Revenues. Now Inventories and Receivables rose by 20.6% and 22.4% respectively.

If you accept that Revenues rose due to advantageous pricing as opposed to increased sales of production [which is the case] then this figure is confirmed by the increase within the Inventory. It is also interesting to note that if Revenues hide the sold production, Receivables suggest that BHP is financing their customers purchases. In this “high demand” era, why is that?

BHP is a highly cyclical company. BHP is a “Pricetaker” not a “Pricemaker” thus, in weak commodity price cycles, BHP can indeed lose money.

Therefore BHP has certainly boosted Net Income by;
Tax + Exceptional + CapInt………………………………………$612M + ?
Retained Earnings………………………………………………….$2.957B
Total………………………………………………………………..$3.569B+

Liquidity [Working Capital]
Total Current Assets……..$8776………………$11087
Total Current Liabilities…..$8661………………$10249
Net Current Assets……….$115.0……………..$838.0
Current Ratio……………….1.01………………..1.08

For a “Blue Chip” Investment, BHP does not come close to passing the working capital liquidity test [minimum = 2.0] It is almost 100% below the cut-off point minimum.

This, especially in a contractionary credit cycle is vital. We have seen $10B Hedge Funds go bankrupt in the space of 5 days. I’m not suggesting BHP is a Hedge Fund, just that liquidity is vitally important and if you don’t have it when you need it, bad things happen.

BHP does have a newly negotiated $3.0B credit revolver…but were you expecting your rock solid investment ever requiring emergency bank lending?

In addition BHP debt is increasing in the time of plenty;

BHP have issued new debt, and placed a Shelf Registration for future debt.
This of course underlines the fact that the cashflow from Net Earnings, ahem, has been spent.
Future Working Capital requirements exceeding cash on hand etc, will be financed via this new issued debt and the debt registered, and already sold.

$788M Floating rate due 2008
$788M 4.375% due 2014
$875M Floating rate due 2009
$625M 5.125% due 2012
$750M 5.4% due 2017

Those “Floating” rates, could seriously impact future earnings…..if of course they are not capitalised or re-financed.

So what were the real, or adjusted earnings?
Adjusted figures………………………………$1.894B

Not quite the headline grabbing BHP version.


jog on
d998
 
Some alternatives;
 

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So you're saying that BHP is fundamentally unsound or at least, less fundamentally secure than they would have us believe? Yet since publishing its financials 8 weeks ago, it's moved form 55 to 85. (In fact only today looking a little toppy [very toppy actually] from a technical perspective.)

It's certainly been technically tradable since late September when it broke that major level at 70, but from a fundamental viewpoint (which you have) what is your current position and view?
 
Maybe the definition of a technical analyst should be that old saw: someone who knows the price of everything and the value of nothing :)

:LOL: very true :LOL:

yet, the fundamentalists need to get theirs too ;)

and it should be "those that know the value of everything, yet dont pay attention to where price is, or how did it get there, and what it can do" :p


PS: i am in the end, an economist, and trade base on price actions. given my time frames, i lose when i pay attention to fundamentals, and, well, in the end, fundamentals are .....well....noise:eek:
 
PS: i am in the end, an economist, and trade base on price actions. given my time frames, i lose when i pay attention to fundamentals, and, well, in the end, fundamentals are .....well....noise:eek:

If your timeframes are less than years, then fundamentals probably are, as you say, noise.

Db
 
If your timeframes are less than years, then fundamentals probably are, as you say, noise.

Db


i trade off the 1 minute chart :cheesy: :cheesy: ....would funtamentals be noise? :LOL: :LOL: :LOL:











just joking, 240-60-15 min combo.
 
i trade off the 1 minute chart :cheesy: :cheesy: ....would funtamentals be noise? :LOL: :LOL: :LOL:
just joking, 240-60-15 min combo.

If you're not using fundamentals to select your instrument, they'd be irrelevant to your trading, though not to your results.

Db
 
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