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If salt loses its saltiness what will you season it with? –Luke 14:34

18 May 2019

STOCK MARKET--What are the best two or three indicators for technical and fundamental analysis?

Simplicity still works in investing/trading, and below are my favourite indicators for both technical and fundamental. Some traders prefer to use highly complex methods while others use extremely simple and free resources. You will be surprised to know that the results of both are extremely close.
Fundamental analysis:
1.       COT report (Top down approach): They measure the number of futures contracts held by major participants. This is my favorite market technique for longer-term trading (3–6 months). Now, you can leverage this powerful indicator and turn in into a leading one. Many would not be very familiar with this. To be specific, the aim should be, What about trying to infer the intentions of the smart money? After all, only they can impact the prices and cause major shifts. So, is it possible? The concept is simple, you take the COT report, decompose it by players, calculate their positions, do some basic statistics to further understand where are the positions now, and then chart the results with the spot prices to give you a better idea of what you’re dealing with.

2.      P/E ratio & PEG ratio (Bottom-up approach): The famous Price-to-earnings ratio is extremely common in Wall Street and is used to detect relative undervaluation / overvaluation in the market. It is used by calculating a company’s market price to its earnings and then comparing it to the company’s peers or the whole industry. Low P/E ratios are often associated with “cheapness” and high P/E ratios are associated with the stock being overvalued. The PEG ratio takes the P/E ratio and divides it by the projected earnings growth rate. It is better with comparing companies with different growth rates. A PEG ratio of less than 1 is desired. According to Peter Lynch, a company that is fairly priced will have its P/E ratio equals its growth rate, hence its PEG ratio will equal 1 (PEG = Price-to-earnings / earnings growth rate).
Technical analysis:
1.       Bollinger bands: They are are a statistical intuitive tool that can actually be a trading system on their own. Many of my trades have been confirmed by the Bands and have provided great returns. The bands are by default 2 standard deviations away from the price plus a 20-period moving average (that is much less relevant than the bands). The disadvantage is that the bands assume normality which is not the case, but they provide a good approximation of support/resistance zones in a ranging market.
2.      RSI: It usually provides decent results with the overbought/oversold zones and graphical elements on it, and if used subjectively with divergences, it can offer greater potential. It’s wise to keep it as a reserve when you need just a little bit of confirmation for your trade.

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