Monday, January 30, 2012

MetaStock U looks at ways to incorporate fundamentals into your technical analysis

MetaStock SPRS Series - Week 53 - TechniTrader® Stock Discussion for MetaStock Users: XLNX - January 30, 2012
By: Martha Stokes C.M.T.

One of the things I try to teach my students is to realize that the technical side of analysis is simply the graphical view of what is going on with the fundamentals of a company. Institutions dominate the market and account for an estimated 70-90% of shares traded each day. What the institutions decide to buy or sell matters. It is therefore; always important to know the institutional ownership percentage of a stock to help you interpret the charts better.

Here is an example:

XLNX is in the electronics industry under the semi-conductor sector. It has about 98% institutional ownership right now. That means only 2% of the outstanding shares are owned by small lot investors or retail traders. This data is fundamental, some of the most important fundamental information, that is easily added to your technical analysis and increases your understanding and ability to interpret the price action without needing a degree in accounting or being a CPA. These are basic fundamentals that you should pay attention to.

Chart 1

There are 20-25 major institutions (mutual funds, hedge funds, and pension funds) that influence stock price action greatly. Although there are over 16,000 funds of various sizes and type, these top institutions are the ones that truly matter because all of the other funds chase the big funds.

TechniTrader® indicators are designed to expose when the giant funds are moving in quietly because these funds are using Dark Pools, Icebergs, and other quiet accumulation buying methods for their trades.

When a stock such as XLNX has more than 80-85% institutional ownership, this will affect how price behaves.

Knowing ahead of placing any trade what that percentage is at that time, can help you determine what price and volume action to check for to determine who is buying and who is selling.

Generally if the institutions own most of the outstanding shares, then some fund will be selling in order for buying to occur.

When a giant fund starts selling out at a fundamental resistance level, the selling can tip the price action to the downside. This is what happened on XNLX as it ran into the high of 2011. Funds started selling even as buyers came in on the good news. The exhaustion volume pattern warns that this was not only large lot institutions but also High Frequency Traders trading this stock on the millisecond scale during that day.

Other fundamentals that can be particularly useful to short term traders are:

  1. Yearly highs pose fundamental as well as technical resistance levels, giving these highs extra resistance clout, especially in weaker market conditions. Many stocks that have very high institutional ownership can experience more severe corrections due to giant funds rotating out or selling off at least some of their holdings at yearly highs. Knowing this fact can help you mark these resistance levels to alert you to the higher risk of deeper retracements or corrections.
  2. All-time highs are major fundamental resistance levels, especially if those years were big bear market years. XLNX’s all-time high was around 92. Currently this is not a factor, and it is actually a plus for XLNX because there is plenty of room for the stock to move up.
Stocks sometimes have very high institutional ownership percentages and still are great swing and momentum trades. The trick is to be aware of the giant funds and the risk of their profit-taking areas.

Retail traders tend to not use anything but technical analysis and although you can certainly trade with just technicals, if you incorporate a few of the simple fundamentals mentioned above in your chart analysis, you will find that you have a better understanding of what is going on behind the price and volume action.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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