More on Fundamental vs Technical analysis

I’d like to say a few more words about the raging debate of fundamental vs technical analysis.  While fundamental purists love to bash technical analysis, it is often that technical traders support fundamental moves.  Let’s take a look at FE as an example.

FirstEnergy is an energy provider servicing the mid-west United States.  After the crash of 2008 like almost every stock it went through a strong period of decline, but what’s different from other stocks is that it’s recovery starting failing at the end of 2009.  Indeed it has gone back down to the lows of 2009 and is now pushing lower.  A technical analyst would have seen trouble in this stock starting in February 2010 when it broke the support established in November 2009 and began what would be a strong move downwards.

During this exact time in February a big fundamental move occurred – FirstEnergy initiated a merger with Allegheny which caused an overnight drop of 5% in the stock price.  This occurred 4 days after the breakdown of the aforementioned November support.

Click to enlarge

A week ago today the Motley Fool had an article detailing why FE could be a good short position.  The article is found here.  They list a high short interest ratio, low cash flow, high liabilities, and an overvaluation as the reasons for their call.

Whith FE trading well below both it’s 200 and 50 day moving averages with a strong monthly downtrend, it is looking like Motley Fool’s article is confirmed by technical analysis.  It is a good example of how technical and fundamental analysis often go hand in hand.  Alphatrend’s Brian Shannon put it best when he said that fundamental events often follow the prevailing trend (which a technical analyst would identify).

It is also of note that institutional trading usually is privy to better information than the general public, thus their moves would show up in the charts before the masses would learn about it.


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