Today's Quote: “Every extension of knowledge arises from making the conscious the unconscious." - Friedrich Nietzsche.

Fundamental versus Technical, continued…

Have you ever seen a stock gap up at open because they announce good earnings that morning or after hours? By gapping up, it means that the stock opened at 9:30 AM EST at a different price than it closed at 4:00 PM EST the prior day. Why would a stock open at a different price? Usually that is due to news in the market in general, or news concerning that stock. For example, the stock may be gapping up because they had outstanding earnings. Now, to a fundamental trader, this is a buy signal.

So, have you even seen a stock gap up on good news, then sell off all day? Or sell off all week? Or how about put in a multi-month high? If you have been following the market for any period of time you have undoubtedly seen this. This must confuse fundamentalists to no end. It defies the very nature of their purpose in the market. Yet to a technical trader, it can make perfect sense.

Once again it comes down to the variable that is always unknown: how much of the ‘news’ has been built into the price already. While the earnings may have beaten last year, maybe they were supposed to beat last year by more than they actually did. If they beet the ‘analysts number’, perhaps they did not beet the ‘whisper’ number. If they beat the ‘whisper number’, perhaps they didn’t beat the ‘real whisper number’. You don’t think they tell us the real whisper number, do you? And even if they beat every number out there, what if everyone who wants to buy has already bought because they liked the number anywhere in that range? And, what about all the people who will take profits on the gap up and cause a sell-off? Do we ever know how many people are in for the long haul, and how many just want a quick ride?

Charts can tell us the difference between a novice gap on good news, and a professional gap igniting a new move on good news. This is one of the many thoughts we will keep fresh in your mind regarding this debate over the next two issues.