What do Warren Buffett and Benjamin Graham have in common?
Other than the fact they’ve been ultra-successful investors, neither has subscribed to the idea of technical analysis.
Warren Buffett will tell you he realized technical analysis didn’t work was when “I turned the charts upside down and didn’t get a different answer.”
Lynch found that, “Charts are great for predicting the past.”
While it’s tough to argue with them, we’ll just have to disagree.
If fundamental analysis works for you – as it has done for Buffett – that’s fine.
But we choose to combine the two schools of thought for a fuller view. It’s allowed us to capture up to 85% success with near- and long-term trade opportunities.
Take Coca-Cola (KO) for example, one of Warren Buffett’s biggest holdings
In October 2014, overbought and over-extended, shares of Coke plummeted well off $45 highs to less than $40 on an earnings disaster.
Falling sales and a stronger dollar lead to a 14% decline in profits.
The company even lowered its long-term revenue targets and expected to miss EPS numbers, sending investors running for the exits.
Fundamental investors were running scared.
But look at what our technical pivot points found at each low point at the time.
Coke again found support at its 200-day moving average as it did in August 2014. MACD became massively oversold. And Money Flow (MFI) was starting to become oversold.
So we bought at $40, and cashed out at $45 highs.
If you look at the technical points going back to 2012, each time RSI dipped to its 30-line coupled with an oversold move to historical support on MACD, the stock bounced. Now look at what happens when Money Flow (MFI) fell to or below its 20-line.
The stock bounces.
Look at it another way.
Notice what happens when Coke falls to its lower Bollinger Band coupled with a move to less than negative 75 on Williams % Range.
The stock bounces, allowing us to capture a quick move.
But by the time Coke reached $45 a share in late November 2014, we went short the stock.
One, the stock was now challenging double top resistance at the upper Bollinger Band. We knew that potential failure at that point could send the stock screaming lower. Two, William % Range was just as overbought as it was in October 2014.
Three, if we return to the Stock Charts chart above, notice what’s happening.
MACD became overbought. RSI became overbought for the second time above its 70-line. And Money Flow was topping out at levels of historical failure.
Warren Buffett – and his many fans — may not subscribe to technical analysis, but it works. But so does fundamental analysis.
It’s why we always combine the two schools of thought.
Without that combination, our track records wouldn’t be as good as they’ve been.
Ian L. Cooper
Options Oracle