A stock could move up or down based on fundamental factors, technical reasons, and overall market sentiment.
While sales and earnings growth are the primary reasons behind a stock’s movement, a little bit of technical analysis would come in handy for timing your stock investments.
Let’s look at an example: Aurobindo Pharma
The stock did pretty well after breaking out of a consolidation base pattern in September 2013. During its dream run from September 2013-January 2016, the stock multiplied over 9 times. And this was the period when it continued to trade above its 40-week moving average.
Aurobindo breached its 40-week moving average in February 2016 and since then it has done absolutely nothing. That’s because the company’s sales and earnings growth slowed down and more importantly pharma stocks, in general, went out of favor. However, price as a leading indicator had already given investors a warning in the form of the 40-week moving average breach.
At MarketSmith India, we use the CAN SLIM investment strategy, which is a blend of both fundamental and technical analysis.
While fundamental factors help us in screening for quality stocks, technical analysis aids in timing our investment decisions.
Among other selling rules, the breach of a long-term moving average such as 40-week serves as a very important sell signal.
I have written about CAN SLIM strategy in detail.
All the best!