FA vs TA on Netflix: A Time and Place for Both

Michael Pachter of Wedbush Securities: People do not rely on me for buy and sell decisions, but for content costs (on $NFLX)

He is absolutely right. And this one statement can be used summarize the difference between the uses of Fundamental Analysis (FA) and Technical Analysis (TA). Let me drill down to it.

It is when you get to the point where you have decided on a sector to invest in, that FA makes a difference. Notice I used the word invest, not trade. Take away number 1, timeframe is important. If you decide that Specialty Retailers are right for your investment then using FA to understand how comparable companies rank relative to each other and the mean is important. This is the key value of FA. Michael Pachter understood this when he made the quote above. His customers want to understand which companies are overvalued from the mean in the long run. Where FA oversteps its bounds is when the price targets created come with a timeframe to get there. And Michael does well on that front also, not suggesting to sell NFLX because it is above his $80 target but laying out hwy several years from now it should revert to the mean PE ratio.

This is where TA takes over. TA is designed to give entry and exit points for a trade based on price action. NFLX would show up on any TA scan of strong price action. But the trader here is not looking for the next few years, they may only be looking for the next few weeks, days or minutes. A very different timeframe. In a sense FA does not matter to TA.

The chart for Netflix above shows that despite the poor FA picture that the stock has been in an uptrend for over a year with good support at the 100 day Simple Moving Average. It has also just broken above the double top at 248 and is holding above it on a test of support there today. A trader would not give up on that price action lightly just because a FA thinks it is overvalued. In fact a continued hold over that level would set a target of 270 on a measured move higher. TA are known (myself included) for making statements like “I don’t care what the company does it is just a ticker, price and volume to me”. Take away number 2, that statement is also total BS. Every TA will make exceptions for events, even those that help sharpen the FA pencil, like earnings report as NFLX does tonight.

So you see there is a time and a place for both TA and FA. Not always used in combination but always used to complement each other. With Earnings tonight the battle will rage at its peak. I will be watching from the sidelines. After the answers are revealed let your timeframe assist you in deciding.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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