Buying shares based on sound fundamental analysis is not always enough as we need to make sure that the company's share price is exhibiting positive momentum, too, or at least is showing signs of basing out if we are going to try to catch the bottom after a period of underperformance. One of the simplest ways to do this is to screen your watch list of companies for those that are close to, or have just signalled, a chart break-out. I do this on a daily basis using the screening tools from Investors Intelligence (www.investorsintelligence.com).
I use both swing charts and point-and-figure charts to identify potential investment opportunities to investigate. Moreover, if a company has a sound investment case and is undervalued on fundamentals, the chances of a chart break-out proving a profitable entry point is far greater. As soon as this happens, other momentum investors will be tempted to buy the shares to profit from a potential rerating.
This also explains why some of my stock recommendations move so dramatically as I am targeting shares that have the potential to break out of previous trading ranges. I can skew the odds in our favour by also screening for shares on the verge of chart break-outs where the price moves have been underpinned by high trading volumes. In other words, there is conviction among the buyers which makes it more likely the break-out will hold rather than prove to be a false signal.
I also screen companies for those showing positive share price momentum by keeping a close eye on shares registering 12-month highs and those where daily and weekly share price movements have been on above-average trading volumes. In addition, I monitor shares that have shown key day and weekly share price reversals or high and low poles which can be major indicators of a major change in momentum and share price trend.
