I am a firm believer in using both technical analysis and fundamental research as stock picking tools. Many investors mistakenly specialize in one discipline or the other rather than a mixture of the two.
Market technicians are often guilty of reaching the conclusion that all the fundamental information is already inherent in the price of a security, therefore researching fundamentals is redundant. At the same time, hard-core fundamentalists believe that technical analysis only charts the past and thus cannot help with projecting the future.
I have found both of these sentiments to be correct and to be wrong at the same time. All the fundamental information about a stock is inherent in its price. However, studying price alone will not increase your odds of making a winning trade.
Knowing fundamentals while ignoring the technical picture may provide a reason for the stock movement, but does not confirm that price will move in any specific direction. Focusing solely on the technical picture will tell you what has happened and what may happen. But there are no guarantees or statistical tests that have uniformly proven much of traditional technical analysis works to provide an edge.
So what's an investor to do?
The answer is to use both fundamentals and technical analysis to choose stocks. If both disciplines agree on a particular stock, that stock becomes a strong candidate to add to your portfolio or to short. When there is disagreement, a short-term trade often presents itself.
Today's trade is an example of a classic case of fundamentals and technical analysis disagreeing.
The stock is Camtek (Nasdaq: CAMT), an Israeli designer, developer and manufacturer of automatic optical inspection (AOI) systems. AOI systems are computer-driven systems that inspect electronic components for defects at the manufacturing level. The company also makes products for the printed circuit board industry.
Additionally, it is in the advanced stages of developing a digital 3-D printing system called the GreenJet System. This printer is intended to be used for the disposition of solder mask on circuit boards. The first commercial sales of this product are slated to take place sometime in 2014.
Camtek, which has a market cap of about $150 million, posted solid results for the third quarter with revenue of $21.7 million and operating cash flow of $3.1 million. It ended the quarter with a cash position of $20.3 million.
Shares soared higher late last month on rumors that the company was launching the 3-D printer system. It turns out the company will only be testing the system with a client at the start of 2014. Profits are only expected should the testing produce positive results, and then not until the tail end of 2014.
While there is certainly nothing wrong with the known fundamental health of Camtek, the technical picture paints a clear short selling opportunity.
Shares made a huge run from under $2, soaring more than 200% and gapping to a high near $6.50 in just two days. They have since fallen back to the $4.50 to $5 range. This chart pattern indicates exhaustion on the upside, which means the price should soon collapse.
While the longer-term fundamental picture for CAMT may be bullish, traders are likely to be able to make a quick profit by shorting the stock here. As you can see, considering the fundamentals and technicals together clarifies what action makes sense here and now.
Action to Take -->
-- Sell CAMT short between $4 and $6
-- Set stop-loss order $1 above your entry level
-- Set initial price target at $2 for a gain of 50% to 67% in six weeks
This article originally appeared at ProfitableTrading.com:
Chart Predicts This Little 200% Gainer is About to Collapse