Investment Insights on Market Volatility
When companies catch our attention due to their strong business fundamentals, we’re keen to buy. The challenge often lies in timing. Typically, rating is a crucial factor, but during market downturns—like the one we experienced on Thursday—valuation takes a back seat. Sellers may simply want out, and emotions can overpower logical analysis. In such turbulent times, a chart reflecting both rational and irrational market behaviors can be particularly insightful.
The recent rebound of the S&P 500 is a good sign, yet the impact of the previous downturn still persists. We tend to keep our chart analyses straightforward, focusing on key support and resistance lines based on 50-day and 200-day moving averages, as well as trend lines and historical levels. Tools like the Relative Strength Indicator (RSI) can also help indicate overbought or oversold conditions. Moreover, monitoring trading volume is essential to assess the reliability of price movements.
Our strategy involves purchasing stocks from companies we believe possess strong fundamentals and are reasonably priced, even if the technical setup doesn’t look great. But really, we wouldn’t buy into a company that appears unsound, regardless of how promising its chart might seem. By reviewing charts, we can identify crucial levels beforehand, creating a roadmap that helps us stay grounded in volatile markets. Having that planned path assists in managing emotions.
This past Friday, we added shares of Corning and Honeywell. Notably, we had previously purchased Corning earlier in the week. Additionally, we acquired Meta Platforms as well. For our analysis, we’re using two-year charts to identify entry points for Microsoft and Nike.
Microsoft Buy Levels: $500 and $465
Microsoft is currently about 6.5% below its all-time high. The 50-day moving average has not provided much support since last August, but the stock hit a low near $495 earlier this month. Given these levels, we think it’s a decent time to invest. However, since the current 50-day price stands at $514, we shouldn’t rush into a “declaration buy.” If the 50-day moving average stabilizes and begins acting as support, we might end up paying a little more, but it’ll be a more secure position. If $495 fails, we won’t see much support until around $465.
At that level, we encounter both the 200-day moving average and a previous high from July 2024. According to the polarity principle in technical analysis, previous highs often turn into support when surpassed, and vice versa. So, a dip to $465 suggests the stock is down nearly 15% from its peak, currently trading around 29 times forward earnings—a relatively attractive valuation compared to recent years.
Nike Buy Levels: $65, $60, and Mid-$50s
As for Nike, we see its fundamentals improving as management’s turnaround strategy unfolds. We believe earnings could recover by the end of this fiscal year, making the stock around $65 appealing. That said, the chart isn’t visually appealing—Nike is trading below both its 50-day and 200-day moving averages and is nearing a “death cross,” often seen as a bearish signal.
Still, an unappealing chart doesn’t necessarily deter us from considering the stock’s potential. We need, however, to be realistic about the possibility of further declines, as both moving averages hover near $65.50, representing substantial resistance. The next support level is around $60, which previously held after the April lows, with further support in the mid-$50s. Unless there’s severe negative news, dipping into this area could be attractive, particularly since it aligns with prior trade war concerns, and progress has been made since then. We might think about gradually building a position every time the stock falls by about $3 to $5.
Lastly, there’s the concept of “price action.” This term reflects how stocks react to various news. Are prices rising despite bad news, suggesting overly pessimistic investor sentiment? Or declining in the face of good news, like what Palantir experienced after an earnings report? It’s crucial to explore whether sales in companies like Microsoft are driven by previous losses or if they reflect underlying quality and value—qualities that entice investors during uncertain times.
Understanding these price movements is subjective, and every investor interprets them differently. However, analyzing a stock’s behavior in response to news, industry peers, or market trends—while studying charts—can significantly aid in decision-making during turbulent times. As a long-term investor, I prioritize stock selection based on fundamentals, bypassing charts of companies I’m not interested in. Nevertheless, during volatile periods, being mindful of price actions can help us invest in stocks we’re passionate about in a disciplined manner.
