Many of you might have been surprised by the title of this post. Why? Rarely do we hear about technical trading when discussing dividend stocks. The main reason is a logical one of course. Dividend investing is all about value and that usually translates exclusively to fundamentals. So there is no surprise in the fact that all of the main things I look for in dividend stocks such as profits, revenues, a strong balance sheet, and others all relate to fundamentals. However, I don’t believe that you should ignore technical indicators when investing. Would I choose a stock based on those indicators? No. However, I would choose a better entry point for my stocks thanks to technical levels.
Why Technical Levels Matter
You might not invest based on technical indicators. In fact, if you’re on this blog, it’s safe to say that it’s not your primary concern. That being said, many others pay attention to these indicators which makes expressions such as momentum matter. If you are trying to buy a stock that everyone else is trying to sell, it might not be the best time to do so.
What I Look At; Moving Averages
There are dozens of different fundamentals that are used by chartists, the most popular being moving averages. One of the easiest measures to look at is a moving average. It simply indicates where a stock is compared to its average close for a determined period. You can have a 3 day moving average, 5 days, 10, 20, 50, 200, etc. You get the idea. It matters because many investors trade on this information. Very recently, Apple (AAPL) saw its stock decline below its 200 day moving average which it had not done in over 2 years!! That made headlines as many signaled that Apple’s stock might move much lower. You certainly might not believe this information but it’s still useful to know about it since others are trading on it.
Which Signals To Look For
Personally, I’m much more interested in longer term signals than short term ones since dividend investing is about the long term. So using a 50 and 200 day moving average has worked well for me.
There are many different sources and one easy free one is StockCharts.com, you can see an example of what you can get here:
As you can see, GE is slightly above its 200 day average (red) but lower than its 50 day one. It’s a mixed signal.
What I Use
I do still use stockcharts but personally I’ve been using trend analysis much more. It’s basically a score between -100 to +100 for each stock that depends on different moving averages. It gives me an easier way to judge the stocks. You can see an example of the result here:
It is unfortunately a paid service (although not very expensive) but you can try it for free here. If you do, please let me know how you like it.
Do You Use Technical Levels?
I’d love to hear if you use them at all and if so, how?
Excellent tutorial and very nicely explained!
Technicals are good if you are looking for short term gains – that’s where I use them most or to look for a good entry point.
This is very interesting but you left me wanting more! Specifically, as a dividend investor (and presumably, more buy-and-hold than day trader) what do you look for in a trend?
For example, are you looking to pick up stocks in company with good fundamentals at a discount? I assume so, but then how does that translate to trends and averages?
Do you look to buy when a stock you’ve been eying is at something below -50 or between -50 and 0, headed upward?
Maybe you could write another post given an example of a practical application… just a thought. 🙂