Despite the fact that fundamentalists like to think that the numbers they crunch are pure whereas examining the charts is somehow tainted, the truth is that both have their strengths and weaknesses, and, if applied well, both can yield favorable results. Having an eye on both while becoming proficient in at least one is certainly better than ignorance of one or the other.
Probably the largest advantage to a tape/chart reader is the ability to quickly assess many stocks or sectors over a relatively short period of time. Each night I do a video show
that examines the markets, and within about 15 to 20 minutes, I can come to a pretty good set of conclusions about what is likely to happen next. As a rule, that's true of the general markets, sectors, and individual stocks.
Generally speaking, the large-range trade that has developed since the beginning of the year looks like it will resolve to the upside before long. In fact, it already has on the Nasdaq Composite
With the Nasdaq leading, all the other indexes are trying to play catch-up, and each one is either breaking out itself or is just about to. Here's the small-cap Russell 2000
(INDEXRUSSELL:RUT) on the verge of a breakout as well.
This is the moment of truth, which happens to come as part of yet another straight up V-shaped move higher. Although it's hard to fathom a breakout without a rest, in this market, discounting that possibility carries its own risk.
With strength in the indices, it's not a stretch to imagine strength in individual stocks. Although broad-based strength remains mostly lacking, there are a number of industry groups that are acting well. With a few tools, it is easy to find sectors that are moving and quickly drill down to the hot stocks within the sector. A current example is the Trucks & Other Vehicles group within the consumer discretionary sector. It's not a glamorous group, but glamor and profits don't necessarily go hand in hand. The majority of the stocks in this group are somewhat thinly traded even though they are billion-dollar-plus companies.
As an example, Hyster-Yale Materials Handling
(NYSE:HY) has a great-looking chart, and though the fundamentals aren't off the map, they are respectable with double-digit revenue growth and a PE ratio of just over 12. The short-term chart exhibits a breakout over multiple time frames that has already carried higher. A bit more of a retrace would provide a good starter buy point with a secondary purchase at lower prices. The trading time frame is a few weeks to months, minimum.
The weekly time frame exhibits a large consolidation over a period of almost half a year now. If it does break higher, it should carry and could easily tack on another 10%.
In a world of 10% and 15% highflier moves in a day, 10% over a couple months might not seem worthwhile, but the probability of a win in this position is reasonably high; unless you are prepared to crash and burn, you can't have only highfliers in your portfolio.
Another stock in the same sector, though one that is a bit more extended already, is Paccar Incorporated
(NASDAQ:PCAR). This stock also exhibits double-digit growth and a PE of 16. Here's that chart with projected entry points and risk.
Although a small and specialized sector, the Trucks & Other Vehicles group has some good relative strength, and in any sector showing relative strength, there will be stocks moving it. Investors just have to focus on finding those stocks and then looking for entry points within them. The oil services sector is doing the same thing right now, so I'll highlight the best stocks in it next time.
Editor's note: L.A. Little is a professional trader, author, and money manager who has written several books and contributed material to many financial sites in addition to authoring his own: Technical Analysis Today. He brings a unique perspective to technical analysis, incorporating his extensive engineering and modeling skills when analyzing the markets.