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Chapter 4. Confirmation: A Powerful Anal... > Confirmation as a Means for Identify...

Confirmation as a Means for Identifying Primary Trends

How do we find the primary trend of an individual stock? That is the key to picking stocks that are likely to grow over the long term. Investors recognize that growth in market price is chaotic in the short term and even the intermediate term, but that over the long term (the stock's primary trend), price is a reaction to earnings strength and to the ability by the company to create and sustain a growth trend. The primary trend involves fundamental changes—sales, profits, financial strength—rather than market price, so fundamental analysis is the key to identifying the primary trend. If we wish to define a “fundamental primary trend,” we should include in that definition the basic indicators we wish to use: sales, earnings per share, trends in working capital and in capitalization, and any other financial features that confirm what these trends indicate.

We are concerned with confirmation on two levels. First is the overall trend itself; we seek confirmation of the long-term growth trend. Second is confirmation of specific fundamental indicators, which is discussed in the next section of this chapter.


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