Beyond the fundamentals of balance sheet and cash flows, we also need to look at the technicals pertaining to the price and the volume charts. In fact, no investment decision is every complete by just looking at the fundamentals of the company. You need to look at the technicals too. Here are a few very important technical factors to examine…

We have read a lot about moving averages. It is time to use that see for break outs and break ins. Also look for short term and long term patterns. Price patterns are largely technical factors. You can compare the price chart with the 100-DMA and the 200-DMA to get cues about the stock. You can examine the supports and resistances on the technical chart and also whether there are any double bottoms, double tops or serious breakouts. These are the key to your investment decision.

Price can be insipid if not supported by volumes. That is why any trend gets accentuated when it has volume support. Volumes can be seen either in terms of number of shares or value. Normally, the number of shares is a better indicator of volumes, especially in smaller stocks. Volumes show whether the interest is building or waning. Volumes are useful in ratifying whether the price trends you see are credible or not.

A good stock must also give easy entry and exit. You don’t want to be caught on the wrong side of a trade. Spreads and basis risk is a case study on how easily you can enter and exit a stock. Volumes are only one side of the story but these volumes must come with narrow spreads and low basis risk. If an order for 10,000 shares is going to take the stock up by Rs.1 then you are running a huge basis risk on the stock.

In financial investing, volatility means risk. It shows a state of abnormality and it means that the price could deviate either ways. That adds to your risk. Volatility represents the standard deviation or the risk of the stock. Prefer stocks that show movement and sensitivity to news flows but are not too volatile. When stocks are too volatile, they become hard to predict and the stop loss risk becomes too high in them. Such stocks are better avoided. Even after you consider all these fundamental and technical factors, you must examine whether the valuation offers a margin of safety to you. That is the last test. Only then, a final decision must be taken.