How To Combine Fundamentals And Technicals

As traders we're all probably guilty at some point of ignoring the big picture, letting our ego get in the way, and in the process letting a solid trade slip away. Speaking personally, I'm a bit of a skeptic, or cynic as those that know me might vouch for. I try not to let the 'dark side' of my personality get in the way of seeing what is happening in the here and now, but at times it is a truly difficult mission. One of the ways that I've found to conquer my own inner demons is to focus on only those issues that make sense to me on both a technical and fundamental basis.

The skeptical side of my personality is most likely the reason that I prefer reversal plays, rather than momentum or trend plays. As an analyst at TradingMarkets however, I do have a responsibility to sniff out the best opportunities in the existing environment. Fortunately for our subscribers, and myself, one of my assigned duties at TM has made participating in varying market conditions that I might not totally agree with, a bit easier. As fate would have it, one of my obligations is to put out a weekly intermediate-term report that focuses on top growth stock prospects according to a blend of stringent fundamental and technical rules ala Investors Business Daily. When it comes to stocks that qualify on this combined basis, there is no time to be caught up with one's dark side.

One such stock that had the right stuff this past week was Countrywide Financial (CFC | Quote | Chart | News | PowerRating). This particular issue was no stranger to my Intermediate-Term Report as CFC had been a member of the report for many months. The stock first qualified for a handle breakout in late 2003. From that pivot, the issue made a great run and for some IT traders could actually have been an existing position all the way up through this past week. For myself though, and for the report's sake, I took it off the watch-list due to a six month limit rule that I have for existing breakouts--in order to keep the lists manageable and fresh.

For Countrywide's latest basing pattern the stock was listed once again as a possible handle choice. This time however, CFC while still making the grade, was put under swing picks and not the handle category that I reserve for my top IBD qualifiers. The reason being in this case was that although the numbers and pattern still looked compelling, we were 'higher up the old trading tree', as traders like Kevin Haggerty might say. Since the stock's early 2003 breakout, this was Countrywide's third weekly basing pattern. Typically, a third or fourth base warrants more caution than those breakouts that trigger out of lower weekly formations. Ultimately, all trends do come to an end, and as a stock becomes more of a household name, the third or fourth time at bat is less likely to produce the proverbial homerun--as this wonderful, 'new' company, is really anything but fresh when it comes to the existing technical tea leaves.

In summary (for this cautious bull), for a stock like CFC, this meant that if a proper, volume trigger did in fact take place out of the current base--breakout traders should take the trade, but one's money management approach to the trade might be tightened, to account for the stock's position and the current market conditions, that have been questionable within the intermediate downtrend.

On 6/7/04, Countrywide's second week on the report, the issue finally triggered in classic style.

As it turns out, thus far Countrywide has been one of the stronger breakouts. The stock did a little scare the day after the high volume breakout by gapping lower, but managed to hold well-above its breakout pivots on that day, and has subsequently gone on to even higher highs. CFC is an example of a solid opportunity that I might have otherwise missed, due to my 'dark side', had I not been obligated to monitor proper breakout candidates for the IT report. The moral of this story is that a strong blend of fundamentals and technicals is a great way to 'get a handle' on your emotions and play the high-probability breakout game for all that it's worth.

This story is not over however...far from it.

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Just like all dogs go to heaven, Bear Butterfly patterns typically get their wings clipped, and the 'dark side' finally gets to play the 'higher-probability' reversal pattern into the zone. Bear Butterfly patterns are based on pattern recognition into a Fibonacci reversal zone. The zone is typically comprised of projections, extensions, and retracements from prior pattern highs and lows. As the name implies, traders are looking for opportunities to short issues demonstrating strength, if the pattern sets up into a resistance zone. Bear Butterflies can be a great way to fade an extended move and are playable on all time frames--giving opportunities to trade reversals for both intraday and position traders.

The third base breakout is still working for longs thus far, but should CFC reach the Bear Butterfly target zone--maybe they can change the ticker symbol to KFC. If it does, I have a feeling the 'dark side' might get some 'dark meat' that is truly delicious when prepared properly, compliments of the Fibonacci pattern zone.

Chris Tyler