Get Sell Signals from the Charts

05/24/2011 3:00 pm EST

Focus: STRATEGIES

Chris Kacher

Managing Director and Chief Investment Strategist, MoKa Investors LLC Co-Founder of VirtueOfSelfishInvesting.com

Both technical and fundamental analysis can give good buy signals, but investment strategist Chris Kacher, PhD explains why he relies solely on technicals to get the most accurate sell signals.

Looking at hybrid analysis with Dr. Chris Kacher. Hi Chris. I know you use a combination of technical and fundamental analysis. How do you do that?

Well, I would first like to preempt that by saying I buy based on fundamentals and technicals in a stock, and that’s pretty much split 50/50. I weigh the two equally, but I sell only on technicals.

Why?

Well, you could have lots of situations. A very pronounced one was March 2000, when all the analysts were talking about Qualcomm (QCOM) going to $1,000, all these other high-flying Internet stocks were, according to them, well undervalued, and meanwhile, the fundamentals did look as rosy as they possibly could in March of 2000.

But my stocks were hitting their sell stops, so I didn’t ask questions. I found myself back in cash. I was just a few days off the March market top, and I had no idea the market was going to do what it did, which was blow apart.

And it did, as everybody knows. When you look at the fundamental analysis, is it top down or is it bottom up?

Generally, it’s bottom up. I’m looking at variables, such as earnings, momentum, sales increases, return on equity, pretax margin.

I’m looking at the landscape of the stock itself. In other words, we have cloud computing stocks, for instance, and I want to see where that particular stock fits into the landscape. Is it a true leader? 

And you can tell if it’s a true leader based on the fundamental criteria, and also on the price action of the stock. So I put all the pieces together and then on a day-to-day basis, I have my group of leading stocks that I’m looking to get into a position should they issue a buy point.

Now what about your technical indicators? What do you use

All sorts of technical indicators, in terms of…well I should say, I keep it simple, first of all, with price following action and moving averages.

OK. Because everything starts with price.

Right. And, that is a fact. All the opinions that you see on CNBC and Fox, well, they’re opinions, and they can actually derail you, scare you out of a position.

So, what I do is keep it simple. I have a clean room environment, where I don’t receive…back when I was working for O’Neil, I did not get the news piped into my office. 

I just prefer to look at the basic, the pure essence of what the stock was telling me in terms of selling the position or in terms of buying the position.

NEXT: Block the Noise and Follow the Pattern

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So, you block out all that noise to just follow your own pattern?

That is generally the best way to do it. Of course, it’s difficult because if the market gaps down the next day, you want to know why. You want to know what’s causing it.

It’s a natural human tendency to want to know the answer, but the answer can scare you out of the position, and that said, I actually do use news in strategic ways. 

For instance, if I see fairly negative news that causes the market to gap down, and the market finishes strong, like it’s done in the last few weeks, with China hiking rates again, things like that, it tells me we’re in a very resilient market environment, and so that’s valuable information. 

There is a saying, if the market reacts positively to negative news, that’s a sign of strength, and the converse also applies.

And that’s why then you use just technical analysis as your exit strategy.

That’s right. And I use, in particular we talk about it in the book and also on the Web site, SelfishInvesting.com, the strategies for selling.

I’ve found that the ten-day moving average and the 50-day moving averages are excellent indicators to use to guide your selling. They can also guide your buying and pyramiding a position that is a winning position.

And managing risks. How do you do that?

That is up to every investor to find what their risk tolerance levels are. 

In other words, I’ve found over time that what works for my trading personality is to buy 25% positions in stocks, and then if the stock is a leader and continues higher, the pocket pivot concept will allow me to get into a second, third, fourth position as it moves higher. 

My average cost, of course, is quite under the price that the stock is trading at, so I have a psychological cushion; a profit in the stock.

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