The Benefits of Combining Fundamental and Technical Analysis

Over the last 22 years, I’ve heard countless arguments for and against fundamental and technical analysis. While neither is perfect, they both have strengths we can capitalize on.

Fundamental analysis shows us what’s under the hood.

At its very core, it helps us arrive at a stock's intrinsic value. It helps us see:

  • A company's competitive advantage
  • A company's earnings growth
  • A company's sales revenue growth
  • A company's market share
  • A company's financial reserves
  • A company's product pipeline
  • The quality of the company's management

In doing so, fundamental analysts focus on a company's financial statements and profit by finding gems that the market has mispriced.

Meanwhile, technical analysis helps us see the psychology of the masses. It uncovers where the herd may be overreacting, which can lead us to oversold and overbought conditions. Oftentimes, all we need are Bollinger Bands (2,20), relative strength (RSI), MACD and Williams’ %R.

Granted, neither school of thought is perfect.

But what one may miss, the other may spot. For example, technical analysis may spot an excessive selling spree that perhaps a fundamental analyst may have missed. Or, an earnings issue may have done great damage for no reason at all that a technician should look at.

Look at Roku Inc. (ROKU) for example.

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ROKU pulled back after missing expectations, but it was a clear overreaction.

However, analysts were still upbeat as every about its future. It beat top and bottom line numbers with revenue of $100.1 million, which was $3 million short of expectations. It also posted $4.56 in average revenue per user, which was a slight deceleration.

However, analysts at Needham argue that numbers don’t reflect the overall health of the company’s ad business. They also argue that revenue per user was impacted by the growth of the channel. William Blair analysts also noted the sell-off was an overreaction, given encouraging momentum across many of ROKU’s business.

“Management indicated that this quarter, video ad sales more than doubled, and have been consistently strong for several quarters,” they noted, as quoted by Market Watch. “Content distribution, which includes revenue sharing from SVOD [streaming video on demand] and TVOD [TV on demand] purchases on the platform, is a little lumpier due to revenue recognition and grew closer to account growth.”

Wedbush also maintained an outperform rating on the stock with a $65 price target. KeyBanc rates ROKU at overweight with an $81 price target.

In short, its true fundamentals were being ignored.

However, along with the fundamental issue, technical analysis also spotted an extreme opportunity. Take a look at ROKU with Bollinger Bands (2,20), relative strength (RSI), MACD and Williams’ %R, for example.

One, the stock was outside of its lower Bollinger Band (2,20), oversold.

Two, Williams’ %R was below its 80-line. Each time this happens, the stock bounces. Three, RSI is back below its 30-line, oversold. When it gets this oversold, ROKU bounces. And four, MACD is at an extreme low. Altogether, this group of technical pivot points tells us the stock is oversold and ready to move higher.

Instead of the bickering between fundamental and technical traders, they’d be better off combining the two schools of thought, as we do.  In fact, doing so can lead to better success.