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Getting Informed About Technicals

3/25/2021

Subscribers to the SmallCap Informer now have a new technical analysis tool to support their decisionmaking.

Our newest feature to the SmallCap Informer website for subscribers is a summary report of a few common technical indicators for all covered stocks. The new Technicals Report is available in left menu in the Subscribers section of the website. It uses the prior day’s closing prices of every stock currently covered in the newsletter, and calculates values and trends accordingly.

Technical indicators are not meant to replace the actions indicated by the buy/hold/sell prices in the newsletter. Instead, they are intended to supplement the decision-making process for stocks “on the cusp,” situations where you might be considering a sell but haven’t yet reached a conclusion.

For example, our usual approach is to hold stocks during periods of a stock’s overvaluation and practice patience when circumstances aren’t working out for a particular company. But your personal risk tolerances, need for cash, or interest in purchasing another stock might cause you to examine your holdings with different objectives, and identifying a stock that is exhibiting technical strength or weakness could be the deciding point in deciding to sell.

Likewise, choosing between several otherwise reasonably well-matched candidates for purchase in your portfolio might be tipped towards the stock with the strongest current technicals.

Looking ahead, we expect to refine the technical indicators and their implementation in the newsletter. For now, though, here is a brief primer on the indicators in the report and how they could be interpreted.

Relative Strength Index (RSI)

RSI measures a stock’s changes in momentum and can serve as warnings that the stock is overbought (if greater than 70) or oversold (if less than 30). An oversold security is usually considered a good long-term investment candidate, while an overbought security has been driven up in price into dangerous territory. Any value between 30 and 70 is neutral.

Money Flow Indicator (MFI)

MFI measures changes in a stock’s price as well as its volume, and can provide warnings that the stock is overbought (if greater than 80) or oversold (if less than 20). As with RSI, oversold stocks have been knocked down in price and could be considered long-term buys.

50- and 200-Day Simple Moving Averages (SMA)

The 50- and 200-Day Simple Moving Averages are among the most common and most basic technical indicators. When a stock’s price crosses a moving average line, a signal is generated. If the price crosses the line from above to below, the signal is bearish (for simplicity, we label it “sell”); if the price crosses from below to above, the signal is bullish (a “buy”). The 200-day moving average is considered a more long-term signal, while the 50-day is a shorter-term indicator.

Our report also includes the number of days since a signal was triggered and the price performance since then.

It’s not uncommon for indicators to show mixed signals, and as some indicators are more short-term-focused than long-term. In addition, each stock may respond differently to different signals depending on its own characteristics.

Fundamentals still govern, so if you are firm in your long-term horizon, you may well choose to ignore the technicals. On the other hand, so many traders and investors follow these indicators that it can be useful to understand the broader market’s current perception of a stock before you make a purchase or sale.

One final note for mobile warriors: the Technicals Report is delivered using “responsive web design,” which means that is scales and resizes according to the size of the user’s web browser, whether on a computer, tablet, or mobile phone. In fact, all of the website is built using this framework (though the PDF versions of the issues are always full-sized and wouldn’t be easily read on a smartphone).

I welcome your comments on the usefulness of the Technicals Report, as well as suggestions you might have for additions and improvements.

  • DOUGLAS GERLACH

Reprinted from the April 2021 issue of the SmallCap Informer.

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