The Value Investor's Guide to Technical Analysis

Technical indicators can identify long-term trends, short-term signals and more

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May 01, 2023
  • Technical analysis and fundamental analysis just don't mix - or do they?
  • Certain technical indicators can be helpful in identifying both long-term and short-term trends and turning points.
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Technical analysis often gets a bad rep among value investors, and not without reason. Technical traders often are not concerned with the fundamentals of the stocks and other securities they buy and sell, preferring instead to utilize charts and patterns to identify short-term opportunities. Value investors, on the other hand, look at the fundamentals of the company with little regard to where the stock price might go in the short term, unless the stock is overvalued.

However, several prominent value investors have used technical indicators to help generate higher returns. For example, gurus like Robert Rodriguez, Arnold Van Den Berg (Trades, Portfolio) and Carl Icahn (Trades, Portfolio) like to look for stocks trading near 52-week lows, as these names may have rebound potential if the market is overreacting to certain headwinds. Some incredibly successful investment firms rely entirely on technical factors, quantitative models and statistical analysis, with the most notable example being Jim Simons (Trades, Portfolio)’ Renaissance Technologies.

That is why, due to interest from members, GuruFocus recently upgraded its technical indicator features; you can read more about the new features here. The site now offers more diverse chart types and indicators to help investors identify momentum trends, volatility and more. Users can add these technical indicators to a stock’s Interactive chart for analysis and even use certain technical indicators to create customized screening criteria on the All-in-One Screener.

Let’s take a look at some of the common ways technical indicators can be integrated into a value investing strategy, as well as how to find these indicators on GuruFocus.

Rebound potential and impending corrections

Stocks that have been in decline, perhaps even to the point of trading near 52-week or broader lows, may have rebound potential depending on whether their business fundamentals remain solid and whether they have a future catalyst that could cause the market to reassess the stock’s valuation.

On the other side of the pendulum, stocks can sometimes be bid up to far above their fair value levels, especially when it comes to growth stocks and story stocks in the enthusiasm of a raging bull market. Sometimes, this means the stock price reaches levels that the business likely could not catch up with even after a decade of impressive earnings growth.

In both cases, fundamental analysis should come first, but technical indicators can provide insight or confirmation on whether or not a stock might be likely to reverse course soon.

For example, take a look at this chart showing the 50-day, 100-day and 200-day simple moving averages for Zoom Video Communications (ZM, Financial), one of the market’s favorite pandemic growth stocks. Once the stock price began dipping below the 50-day moving average line, it began a longer-term decline. The SMA is a simple construct that averages a set number of past data points, and it has a wide variety of applications, from swing trading to analyzing long-term trends. When it comes to long-term trends, I have found the SMA to be useful in predicting whether a trend reversal is sustainable, though it is not a foolproof method.


The relative strength index is another technical indicator that is commonly used to determine a potential price reversal. This momentum oscillator measures the speed and change of price movements, which investors can use to identify overbought and oversold conditions. Traditionally, the RSI is considered overbought at 70 or more and oversold at 30 or less. The RSI is more reliable in trading ranges than it is in trending stocks, and it is not foolproof by any means. However, I have noticed that in some hotly traded stocks like Meta Platforms (META, Financial), the RSI seems to be oddly accurate. The week after Meta’s RSI dropped below 30, the stock made a bullish reversal that has lasted six months now.


Momentum’s role in valuation

Aside from identifying potential reversal points in undervalued and overvalued stocks, momentum indicators can be used in conjunction with value indicators to form more complex valuation models. If a stock still looks undervalued despite showing good momentum recently, that could be a positive signal.

A well-known collection of technical indicators that measures momentum, direction, support and resistance levels via a complex formula is the Ichimoku Kinko Hyo (IKH), or the Ichimoku Cloud. In general, if the price is trading below the cloud, the trend is down, and if the price is trading above the cloud, the trend is up. This trend tends to be sharper when the cloud is moving in the same direction as the price.

Applying the IKH to Intel (INTC, Financial), we can see that, in addition to its price-earnings ratio of 15, the stock may have found a support level after a downtrend. However, the stock has been ranging for several months, so a sustained uptrend may not be imminent.


GuruFocus has even developed a momentum rank for stocks as part of its GF Score fundamental analysis model. The momentum rank is determined using the standardized momentum ratio and other momentum indicators. According to GuruFocus, “The standardized momentum ratio is the average of the performances from 12 months ago to 1 month ago and 6 months ago to 1 month ago, divided by the beta of the stock over the past 12 months.”

GuruFocus found that stocks with a standardized momentum ratio in the 70th percentile tended to perform better than those with the higher ratios, which is why the momentum rank is set to 10 out of 10 at the 70th percentile.

Bulls, bears and macroeconomic indicators

Moving away from individual stocks, another way to use technical analysis is to predict macroeconomic trends, including when the market may be likely to turn from a bull market to a bear market or vice versa.

Historically, one of the most popular macro technical indicators has been the 10-year U.S. Treasury yield. Investors and economists alike use this yield as both a proxy for mortgage rates and an indicator of investors’ overall economic sentiment.

A rising yield indicates demand for Treasury bonds is falling, meaning investors are in a risk-on mood and bullish sentiment is prevailing. A falling yield, on the other hand, means investors are fleeing to the relative safety of Treasury bonds and indicating bearish sentiment rules the day.


The CBOE Volatility Index (VIX), also known as the “fear index,” is a macro technical indicator that represents the market’s expectations of volatility for the next 30 days. The logic is that the more volatile market participants expect the market to be, the more fearful they are, and thus the more likely they are to panic and sell stocks.


Another kind of technical indicator, the so-called Buffett Indicator is a measure of the overall valuation level of a country’s stock market. By comparing a stock market’s ratio of total market cap to gross domestic product, the Buffett Indicator seeks to determine whether a stock market is overvalued, undervalued or fairly priced. According to Warren Buffett (Trades, Portfolio), this is “probably the best single measure of where valuations stand at any given moment.” For example, as of this writing, the Buffett Indicator shows that the total market cap of U.S. companies is 155.1% of the country’s GDP, indicating significant overvaluation.


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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure