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There are two schools of thought when it comes to analyzing and selecting stocks: the fundamental and technical. The majority of research produced by brokerage firms and institutional investors such as mutual and pension funds focuses on "fundamentals." A company’s fundamentals include things like its revenues, its profit margin, how much cash it has in the bank, how much debt it has, what is its cash flow, what are its earnings this year, how does that compare to last year, and most importantly what are its projected earnings for next year and the year after. Fundamental analysts argue that the quality of the underlying company ultimately determines the price of its stock.

Fundamental research may be helpful in determining the long term (one, two, three or more years) direction of a stock but is virtually useless for timing a stock’s short term price swings. There are many many many cases where a company’s profits were going steadily higher even as the price of its stock dropped just as steadily. Investors devoted to fundamental research for their stock selections, usually advocate the "buy and hold" approach to investing.

But as we have illustrated in some detail in another report (The Really Big Advantages of Swing Trading versus Buy and Hold), shorter term "swing" trading has a documented record of significantly outperforming the "buy and hold strategy." Short term trading however requires different tools that are much more time sensitive. Short term traders buy and hold stocks for only a few days or weeks, but certainly not years. Short term traders must employ technical analysis to time their trades.

Technical analysis uses only price and volume. Current prices reflect what information is known about a particular stock at a particular time. History shows that price patterns tend to repeat themselves time after time, day after day, week after week, month after month, and year after year. This fact of life forms the basis for "charting" the cornerstone of technical analysis.

Charting is simply the representation of prices drawn on paper or your computer screen. Every day, a straight vertical line is drawn connecting the high and low prices for that day with a dash to the right of that line showing the closing price. A series of these "bars" trace out patterns. Since these patterns tend to repeat, a technical trader simply watches for a repeating pattern.

Here at Daily Stock Picks chart patterns are one of our primary inputs to selecting stocks. While there are many books with literally hundreds of patterns discussed in exquisite boring detail, we find that all those variations are very confusing, and frankly not very helpful. In fact trying to watch too many things can be harmful to a short-term trader. Remember we are only looking for a move of a few days and don’t plan to hold a stock for years. We focus on only a handful of highly reliable patterns.

One of the most important is a chart "gap." A gap forms on a chart when today’s low is higher than yesterday’s high. Gaps are good indicators of strong underlying demand for a stock. They are buy signals.

Another reliable buy signal occurs with an "outside day." An outside day is when today’s high is higher than yesterday’s high, AND today’s low is lower than yesterday’s low, AND today’s closing price is above yesterday’s high price. It is also a strong buy signal.

Another buy signal to watch for is when a stock closes at a new high price. For example, if you note that today’s closing price is higher than any closing price for the past week or month, that is a potential buy signal. The longer the time period, the stronger the buy signal. A new monthly high is a stronger buy signal than a new weekly high. The explanation is simple: for some reason big investors are suddenly willing to pay more for a stock than they were only a week or month ago. Stock movements are driven by big investors who have huge amounts of money and great information. An individual trader may not have all the advantages of an institutional trader moving millions of dollars around, but that big money trader will leave tracks that you can follow.

The most reliable chart pattern occurs when prices have been going sideways in a relatively narrow range (e.g., $3 to $6 from low to high for a week or more). When one day the price closes above the highest price of the sideways pattern, that is a strong buy signal. Once again, the longer the sideways time period the stronger the signal, when it closes out of the trading range.

If you look at very many stock charts (we recommend the website www.bigcharts.com), you’ll notice that these patterns occur with some regularity. But of course they are not all profitable signals. To sort out which signals are better than others, we watch volume very carefully. Volume is the total number of shares of stock traded each day. On most charts it is plotted below the price bars so that you can easily see if it is going up or down with the price.

If volume increases when you get one of the signals we outline above, it is a stronger signal. In other words, the volume "confirms" the price action. However, if you see a gap up on a stock, but volume that day actually declines, that cancels the buy signal.

Technical analysts believe that volume leads price. Price moves without volume confirmation are not considered valid.

One other thing that we consider very carefully in making any stock selection is the closing price. The closing price each day is the most important price of the day. The closing price is the price that the professional floor traders feel comfortable taking home. So it pays to watch where a stock’s price closes in relation to the day’s high to low range. For example, if you are looking to buy a stock, you want to see the closing price in the upper half of the day’s range. The nearer the closing price is to the high of the day, the stronger the buy signal.

As with volume, use the closing price’s position to confirm or cancel a signal. For example, if the price gaps up, AND volume increases, you have a buy signal and one confirmation. If the closing price is near the high of the day, then you have a second confirmation and a stronger buy signal.

Conservative traders will wait for all three to fall in line to buy. More aggressive traders may act with the buy signal and one confirmation, but only buy half as many shares as usual. For example, if you usually buy 500 shares every time you trade, then with a single confirmation signal you would only buy 250 shares.

So with only four chart patterns, analysis of volume, and where the price closes relative to the high and low price range for the day, you can significantly increase your odds of success when trading short term.

Tech Stocks: How to Pick Tomorrow's Big Winners

The gigantic stock market rise and subsequent collapse of the 1990s was largely a phenomenon of technology stocks. Analysts who should have known better proclaimed that a "new economy" driven by rapidly advancing technology outdated old measures of value like cash flow, profitability, management experience, and financial statistics. In fact the height of the bubble, jokes were made about the dangers of buying stocks that actually made money! Why they were prime examples of the "old economy" and should be avoided.
The subsequent collapse of the tech sector, represented by the NASDAQ composite was of historic proportions. Many of those stocks which raised hundreds of millions of dollars in their IPOs (Initial Public Offerings) by merely slapping a "dot com" after their name, dropped catastrophically. Most investors lost not only their profits but their initial investments and suffered staggering losses.
That all makes it very difficult to wade into those same high technology waters again. But logic should tell you, that the future will be defined by technology. Paper, concrete, and food companies will rise and fall, but none of them will be on the cutting edge of what determines our economic future. The cutting edge is going to be high technology. Refusal to accept that reality will be costly, especially for investors who are not going to be satisfied with making 10% to 12% per year, the average stock market return.
But consider these facts: the surviving tech companies are slim, trim, and mean. The fat has necessarily been trimmed from their operations. Those who refused to make the tough decisions and pull in profligate spending were trounced over the past 5 years. Only those companies who were able to conserve their capital are now able to make the necessary capital investments that will ensure above average profits in the years to come.
In your search for the leaders of the next technology bull market watch these factors:
1) Revenues. Zero in on those companies able to grow revenues 20% or more quarter after quarter.
2) Earnings. Revenues are only part of the picture. Controlling operating expenses leads to earnings growth. Focus on companies that are capable of showing annual earnings growth of 50% or more.
3) Watch debt levels. Well managed technology companies have harbored their capital and are capable of paying off debt. Rising interest rates are an inevitable part of a growing economy. A company overburdened with debt will see their costs spiral steadily higher over the next few years. We prefer to buy companies with no long term debt.
4) Focus on the right companies. In the 1990s anything with a high tech sounding name was sufficient to draw buyers. But in the current environment, IT managers for major companies are being much more careful about the expenditure of funds. Ask yourself these questions: does the company's products help corporations 1) reduce costs, 2) improve productivity, and 3) improve profits.
5) Unlike the 1990s, the bottom line will be the key in any corporate buying decisions. One of the key factors to the dynamic economy of the past 3 quarters has been the historically high gains in productivity. 100 workers today are producing what 110 workers produced only 6 years ago. Technological advances that boost productivity will be in the forefront of the big gainers in the years ahead.

The following areas are ones that our research suggest offer great opportunities.
Internet Telephony. No serious business person is without his or her cell phone. As technology advances, the combination of cell phones and computer access means that executives are no longer tied to their desks. Right now the ability to access full computer services is for the "geeks" only. But when it breaks through for the average person, there will be explosive growth here.
Every executive wants to be able to have full access to their computer data bases without being tied to a desk. Imagine the ability to access computer information via cell phone in a client's office. No more "I'll have to get back to you with that information."
Take a look at Avaya (AV) and Polycom (PLCM). Tech giant and bellwhether company Cisco (CSCO) has just moved into this area in big way.
Closely tied to this is the rapid rise of the wireless sector. The average home consumer is now able to easily set up his or her computer with wireless access among all computers in your home. Wireless access in the home enables you to watch TV with a laptop computer on your lap, researching news and comments in real time.
Right now wireless node points are relatively scarce. But within the next couple years companies will be expanding wireless access points around the globe so that you will be able to access the Internet and/or your home or office computer virtually anywhere in the country without cumbersome modems and wires. Sit down to lunch in Los Angeles, and access the latest market news on your handheld or laptop computer while you are waiting for your entrée to be delivered.
Keeping up with billing and accounting on wireless access networks will require a whole new approach. Take a look at Amdocs (DOX).
With such easy wireless access comes problems with security. Malicious viruses, spyware, stifling spam are all concomitant with easier more widespread computer access. Companies that provide security will never go out of style. Take a look at Symantec (SYMC), Trend Micro (TMIC, and Aladdin Knowledge (ALDN) for starters.
There are many other areas. Just put on your thinking cap. What needs do you see for your business or industry. What companies are moving to address those needs. Peter Lynch, the former manager of the Magellan Fund, is one of the most successful investors of all time. He made the case that the best investments for most people were those that excited them either in their personal or business lives. What companies are providing services that you want, need, or cannot do without? They are the potential big winners of tomorrow.

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