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Factor Investing: Technical Analysis

We call these strategies factors. They are rooted in technical analysis. And they will help you identify the stocks and ETFs most likely to go up in price.

Technical analysis is based solely on price.

It shows you where buyers and sellers have transacted in the past. It’s a visual representation of the supply and demand for a stock or ETF at different price points. It tells us nothing about what will happen in the future.

Technical analysis is the collective actions, not opinions, of every market participant.

When people say it doesn’t work, they’re right. It doesn’t work — all of the time. But neither does any other form of analysis.

Technical analysis helps you:

  • Find favorable Risk/Reward setups.
  • A place to exit if you are wrong.
  • And a place to take profits.

We break technical analysis into three factors:

  • The Breakout Factor
  • The Retest Factor
  • The Support Factor

The Breakout Factor

The breakout factor is triggered when a stock or ETF breaks out above a supply (resistance) level. Often, the stock or ETF is in an uptrend or has been trading in a range for an extended period.

  • Over a four-years, Lululemon tested the $82.50 level three times and broke above $82.50 in March 2018. The stock has gained 387% since then.

The Retest Factor

The Retest Factor is triggered when a stock or ETF retests a previous supply (resistance) level. Often, the stock or ETF is in an uptrend.

  • After breaking above $335.40, Tesla retested the level three months later. Since retesting the $335.40 level, the stock has gained 535%.

The Support Factor

The Support Factor is triggered when a stock or ETF tests a previous demand (support) level. Often, the stock or ETF is in a downtrend or has been trading in a range for an extended period.

  • The demand (support) level at $24 has been tested multiple times since 2000 and held every time. However, that doesn't mean it will hold again.