I often get questions about a company’s fundamental analysis. In my experience, fundamentals are of little value on their own. Oh, don’t get me wrong they do matter, but because they are a horrid timing tool, their most value is realized when looking in the rear view mirror. A good example is this year’s best performing stock, PLSE (up a trivial 320%). PLSE has no revenue, no profits and nothing from every other fundamental metric. As such, it would never show up on any fundamental screens that identified strong companies and would likely be missed by investors. That is unless they also (or instead) used technical analysis.

One common element to finding these “runners” is they will almost always start with a long basing period in which the stock price does nothing but chop around and go sideways. This action drives the bulls away and some of the bears eventually give up out of boredom.  The few that remain are the fuel to create a short squeeze driving buying volume higher acting as the impetus for a strong breakout. Like the basing pattern, volume is also clear when looking at a chart.

Taking a look at the PLSE chart below, we can see price chopped around sideways for about 20 weeks forming a rounded bottom. Price broke out from the blue horizontal resistance on light volume, fell back and retested that same line and then catapulted upward, pushed dramatically higher on more than 20 times the prior average volume.

This is a textbook example of accumulation. Prices can only rocket higher when the BIG guys (institutions) step in and buy. The good news for us little guys is that the BIG GUYS leave trails, not unlike when you are tracking elephants. In the case of institutions, we see their trails in volume patterns.

While this topic is one for another post, the opposite is true too in times of distribution. When the BIG GUYS begin to sell their shares, a topping pattern is typically formed and the elephant’s droppings are visible in the form of large selling volume.  Since it has been before Moses parted the Red Sea that we have seen distribution in the stock market, you are just going to have to believe me on this.