2. Simple Fundamental Analysis

Simple Fundamental Analysis is conducted daily to track the trend of the broader markets. This includes tracking the Dow Jones Industrial Index and the S&P 500 Index. Other indexes include the Nikkei 225 and the FTSE 100.

Simple Fundamental Analysis (SFA) is partially technical

While the name suggests that this analysis is based on fundamentals, it is actually also based on technical analysis. The reason is that price actions usually reveal the fundamentals of the underlying securities.

A declining Index such as that during the 2008 financial meltdown suggests that fundamentals are weakening.

When there is a technical rebound, due to an oversold market, it is also partially fundamental, as traders believe that the current fundamental situation is not all that bad, and they strongly feel that a rebound is possible.

This is why technical levels are so important, as technical and fundamental work together. By reading the technical stuff, tradedragon understands the fundamentals of the market.

SFA explained

Before explaining SFA in detail, it is best to get a brief overview of tradedragon fundamental analysis - Tradedragon reads technical charts of the broad Indexes, CNBC, Bloomberg, Analyst recommendations, FX rates, Libor rates, Commodities prices, economic indicators from Forex Calendars and to a smaller extent Forums such as trademums.com and Yahoo.
For this reason, this analysis is called SFA as it is kept simple. There are no complex Fundamental Valuation theories involved at all.

SFA can be performed by just any person. It works because it is based on the market sentiments as evident by the technical analysis. Fundamental Valuation theories work but they only give fair value estimates and they are complex. These valuation requires investors to carry out tedious financial modelings which are not fancied by traders.

For such valuations, tradedragon also covers them, this is because, SFA includes the study of Analyst Recommendations. These analysts have already done all the fundamental calculation for us! Why bother to do more..? This is how it is done in most Investment Banking superhouse. Equity Analysts perform the fundamental research while Traders do the trades based on their technical analysis.

Tradedragon emphasizes more on technical analysis. Investors who are interested in learning more about fundamental analysis as SFA is just too simple can wait for my next release titled Investdragon. Investdragon fund focuses on pure fundamental valuations, using proven fundamental theories that most FUNDS are using and theories that are taught in business schools. The benefits of investdragon is that investors do not need to track their portfolio daily, but rather monthly.

Tradedragon is a trading fund whose portfolio must be monitored daily for maximal returns.

Stop beating around the bush. Let's just talk about SFA.

1. CNBC - How to use this pumper and dumper.

tradedragon daily routine always begins with CNBC. Read the news first, usually, they give a glimpse of the US economy. Read all the important news on the front page, CNBC only reports the important ones, that is why CNBC is a good summary of the economy.

CNBC also offers insights from fund managers, and articles from its crew of journalists whom tradedragon refer to pumpers and dumpers (no offense). After reading CNBC for 2 years, I have realized a phenomenon that is present almost only in CNBC. Bloomberg usually only offer Factual News and little opinion, though it has abit. On the other hand, CNBC often pump stocks and the market when they are about to peak. CNBC also recommend strong sell on the markets when they are bottoming.

This is not to blame CNBC. This is normal market Psychology. Fear often causes people to sell their holdings at low prices, and Greed often causes people to buy stocks at astronomical prices. Many losers fall into the trap of BUYING HIGH and SELLING LOW.

Tradedragon capitalize on this phenomenon by monitoring CNBC and converting CNBC into a SENTIMENT index. I will try to find out the sentiment of CNBC, whether they are pumping stocks at HIGH PRICES or dumping stocks at BOTTOM PRICES. When these symptoms appear, it is a sign of an impending market reversal for the short term or longer term.

However, sometimes, CNBC also offers BULLISH views when the market is low. This is important, especially when the market is at a technical support as it could lead a market rebound.

Yet, there lies a great difficulty. How would we know whether CNBC bearish views when the market is low could lead to a possibility of a break in the technical support? Afterall, CNBC articles also provide evidence of technical analysis.

This is the part where we have to rely on our own fundamental analysis. I use economic indicators, FX rates, Metal prices to get a feel of the fundamentals. One have to understand that CNBC is a pumper dumper, so one cannot fully rely on CNBC's articles. There are times where CNBC's advices are just fueling FEAR and GREED. tradedragon uses judgement to measure this FEAR and GREED into a sentiment index. Too much FEAR equates to short term market panic, and tradedragon will find technical levels to buy stocks.

tradedragon also uses forums to measure the sentiment of retail investors. Too much optimism usually means that people are greedy. Too much pessimism usually means the opposite.

2. Bloomberg

This news channel is used by most investment banks, thus this is the only news that is well worth reading in detail. Most fund managers make use of Bloomberg news to position their trades.

tradedragon uses Bloomberg to get a feel of the market, and compares this with the sentiment index derived from CNBC. If the Sentiment index shows that FEAR is prevalent, while tradedragon's feel is that the Market should rebound, then this works very well. Tradedragon believes it is best to buy into people's fear, however, tradedragon time the trades well to buy at the lowest possible price and not immediately. Technical, technical, technical.... most important.

3. FOREX and Commodities
There is a correlation between the Stock market and the FOREX + Commodities markets. When the EUR/USD climbs, the US stock market usually climbs. When commodities prices go up, stocks also go up.

It is thus important to monitor the FX and COM rates. If EUR/USD rate is high, it is a sign that EUROPE economy is doing well, and this means high economic growth, and higher metal demand, leading to higher manufacturing in the global markets. Stocks will do well in such conditions.

4. Economic Indicators
These are the most important of all fundamental analysis. If these indicators are good, stocks can advance. tradedragon monitors the important economic indicators such as unemployment claims, NFP, PMI, Industrial production, Housing and Autos sales.

tradedragon indexes these economic indicators by importance, and uses them to determine whether the market would break a support or resistance.

5. TECHNICAL ANALYSIS. The MOST IMPORTANT component of SFA.

I cannot stress enough. TA of the BROAD INDEXES is the most important analysis! All stocks almost move in tandem with the Broad Index. Place long trades when the Index is about to rebound on its support, place SELL orders when the index is hindered by a strong resistance.

TA of the Index usually only comprises SUPPORT/RESISTANCE lines, Fibonacci lines, Trend Channels, Moving Averages, Stochastics and RSI. Actually, that is almost all of tradedragon's TA tools.

That is it for SFA. 

The goal of SFA is to get the direction of the market in order to make a trade decision. If the direction of the market is UP, then only place long orders.

End of Lesson 2

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