Navigating Market Declines with Fundamentals and technical analysis

Whenever the stocks of companies with strong underlying business fundamentals experience sell-offs, it presents a potential buying opportunity. The key question is timing. While valuation is typically the primary consideration, market sentiment-driven declines, like the one observed Thursday, frequently enough prioritize exits over rational pricing. In such environments, acknowledging the influence of irrational behavior alongside basic investing is crucial. Technical charts can be valuable tools,reflecting the collective actions of all market participants.

Although the S&P 500’s reversal into positive territory is encouraging, the previous day’s damage persists. Our approach involves a relatively simple chart analysis,identifying support and resistance levels based on the 50-day and 200-day moving averages,trendlines,and ancient support/resistance. We also utilize momentum indicators like the Relative Strength Index (RSI) to gauge overbought or oversold conditions and track volume to confirm the validity of price movements.

We are willing to purchase shares of companies with strong fundamentals even if their technical setup is unfavorable. Conversely, we avoid investing in companies with weak fundamentals, irrespective of how appealing their charts may appear. Chart analysis helps establish key levels in advance, providing a roadmap for navigating volatile markets and managing emotions. Having a pre-defined plan, developed under calmer circumstances, can be invaluable during market turbulence.

On Friday, we increased our holdings in Corning and Honeywell, the latter of which we also purchased earlier this week.We believe these stocks are currently buyable, along with Meta Platforms, which we also added to our portfolio earlier this week. Below, we present potential buy levels for Microsoft and Nike, using two-year charts.

Microsoft Buy Levels: Around $500 and $465

Microsoft is currently trading approximately 6.5% below its all-time high. the 50-day moving average has offered limited support as August. However, the $495 level has proven resilient, with shares finding a bottom there in early September and again last week. We believe investors can consider purchasing shares at the current price. However, with the 50-day moving average at $514, there’s no immediate need for aggressive buying. Reclaiming the 50-day moving average (red line) would signal a stronger buying opportunity.