Technical vs fundamental analysis at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Technical vs. Fundamental Analysis

It shouldn't really be versus one another, it should say instead complement each other. Technical analysis tools can be used to draw significance to various economic trends. Knowing economic trends can aid the technician in determining the potential significance of a various technical signals and patterns. An investor that marries the knowledge has a strong sense of the market.

The common thread between technical and fundamental analysis is the study of trends. Where technical analysis is the study of trends in price and volume, fundamental analysis concerns itself with economic and corporate growth trends and the projection of performance based on trends of relevant factors.

The basis of all long term trends in price and volume for any tradable is fundamentals. Technical analysis thrives on the study of changing supply and demand patterns. In the study of trends it is important to determine significance in changes in underlying perceptions of value that result from fundamentals and the forecasts of future performance. A balanced understanding of the two disciplines can provide an excellent basis for a successful trading experience.

As with technical analysis, there are many fundamental tools that are purposed toward early identification of trend reversals. A corporate growth rate forecast might be revised as a result of an earnings warning, or perhaps as a result of a sudden or continued decline in industry sales reports, or by association of sector move. Forecasts that are a continuation of the most recent trend and do not range very far into the future can be measured against longer term forecasts as a ratio that may give a fundamental analyst a stronger knowledge of the conditions of market valuation.

It has been said that Industry behavior accounts for 15 to 20% of a stocks fluctuations over time. The economy is suppose to account for 30 to 35% of a stocks fluctuation in price. Specific information on the Company is suppose to account for 30 to 35% of the price of a stock over time. Other factors make up the remaining 15 to 20%.

A graph of the P/E ratio for the S&P500 Index over the last 40 years

An expanding triangle usually cannot sustain the pattern. Penetration is often to the down side. A drop in P/E might mean lower price and constant earnings, or constant price and lower earnings or some variation of the two. If the pattern held, a rising P/E could peak in 5 or 6 years. This usually means price has increased more than earnings. In a positive growth environment that could speak highly of price in the next 5 or 6 years. But it also could mean that price holds steady while earnings continue to decline. The key to the interpretation of this approach is to have a strong sense of earnings. There are many combinations of technical tools and fundamental analysis. Many things are shared between the two disciplines and can be highly useful in a trading environment.

A graph of the S&P500 Index over the last 18 years.

Critical day analysis

Momentum trading - critical day signals on a graph of the S&P500 Index.

When the flow of candle bodies rises leading into the critical day, the expectation is a reversal of that trend and for the flow of candle bodies to fall coming away from a critical day. When the flow of candle bodies falls leading into a critical day, the expectation is a reversal of that short trend and for the flow of candle bodies to rise coming away from the critical day. There are some special circumstance signals such as the March 17/00 signal on the graph above which became a short consolidation period before there was a continuation of the price trend higher. This type of signal cautions a trader to allow price trend to confirm the expectation before risking capital on the trade. The April 18 signal is a special circumstance in that the trend leading into the critical day was still down despite a strong rise in prices on April 17.

Momentum trading - critical day signals on a graph of the Philadelphia Semiconductor Index.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation