Someone on Quora asked me how I used fundamentals in my analysis. Here’s what I wrote:
The short answer is: I don’t. But let me lay out a couple of points.
First, absolutely at the heart of technical analysis, in my opinion at least, is that all the knowledge that can be had is already built into the chart. The chart represents the perfect presentation of the balance of supply and demand for a particular financial instrument. To assume that you can have some kind of special insight above and beyond what everyone else on the planet has already put into that price chart is, to my way of thinking, arrogant in the extreme.
And how would fundamental information – – even inside information – – be reliably helpful? As I am typing this, the markets are closed, but Facebook got hit pretty hard after hours. From a fundamental standpoint, this makes little sense – – they absolutely blew away all the revenue projections and earnings projections. Their fundamentals were astoundingly good. And yet their stock is getting monkey-spanked. The chart was far more predictive of that than a desk full of fundamental analyst reports could ever be.
Second, I would say that having a wispy awareness of a company isn’t harmful, but it’s just not important. Take Amazon, for example………around October 10th, I did a post on my blog saying that it was likely to have a big drop in price over time, since it was mashed up against the highest part of its wedge pattern. It’s now about $80 cheaper, and that was only three weeks ago.
The fact that the P/E was about 207 at the time was humorously insane to me, but that really wasn’t why I was bearish – – it was just icing on the cake. But to my way of trading, I don’t care about the management, the products, earnings, fundamentals, industry, sector, or prospects – – I often don’t even know what the company does (or, in some cases, what the NAME of the company is). It’s just a chart and a ticker symbol to me.