I have studied technical analysis for many years. What I have discovered might come as a surprise to many:

#-ad_banner-#The majority of technical analysis is pure nonsense.

While patterns and indicators appear to repeat themselves in a consistent manner, most of the time these patterns have zero predictive value and are not consistently repeatable when properly statistically tested in the stock market.

Hindsight bias and flaws in human perception are the main reasons that technical analysis remains popular yet fails again and again when applied to real-time decision-making in the stock market.

However, there are two technical analysis patterns that I have found that do actually put the odds in my favor when tested over a series of trades. Remember, this does not mean that every trade entered due to these patterns will be a winner. However, it does mean that more trade entries than not will result in profits.

The patterns I’m referring to:

1. Stocks are more likely to fall after a series of successively higher closes than to continue higher.
2. Stocks are more likely to bounce higher after a series of successively lower closes than to continue lower.

I know this flies in the face of traditional wisdom, but it’s true. Larry Connors, my former associate at market research firm Connors Group, lays out the research in detail in his book “How Markets Really Work.”

While these two patterns have been proven to improve odds over the long run, I prefer to take the investment decision-making process one step further prior to risking money on a trade.
Remember, the chart only shows what has happened in the past. The real price drivers are a wide range of fundamental and economic factors. I have discovered that combining technical screens with fundamentals provides a much more profitable edge than either technique used alone. Obviously, this isn’t foolproof, but I have found that it is highly effective for choosing low-risk, high-profit stock trades.

The latest stock that has appeared as a buy on my technical/fundamental screener is supercomputer company Cray Inc. (Nasdaq: CRAY).   

Founded in 1987, Seattle-based Cray is one of the original supercomputer companies. It remains a global leader in supercomputing with its Cray XC30 supercomputers and Cray CS300 cluster systems.

The company provides high-performance data analysis, adaptive storage and hybrid computing systems. Specializing in Big Data solutions, Cray’s products and services are used in research, intelligence, defense, finance, weather forecasting and aerospace, among other sectors.

The company boasts a market cap of $1.4 billion, revenue of $526 million in the past 12 months, and over $206 million in cash.

Most recently, supercomputer sales exceeded estimates, sending fourth-quarter revenue soaring 63% to $307.4 million. In addition, net income climbed to $51 million, or $1.27 a share, from $14 million, or $0.36, a year earlier.

Most interestingly, IBM (NYSE: IBM) reached an agreement to sell part of its supercomputing business to Chinese company Lenovo. This means that Cray will likely sell more of its products this year while IBM is in the process of partially divesting from the business.

This bullish news sent shares of CRAY soaring 39% to a decade high above $41 on Feb. 14. After the surge, profit-takers stepped into the fray, sending shares plunging about 15%. This pullback, combined with the positive fundamentals, creates a great buying opportunity.

I expect a slow upward climb in CRAY, but I think it makes sense to wait for shares to move above $37 on a daily close to enter a long position.

Action to Take –>
— Buy CRAY on a close above $37
— Set stop-loss at $31.90
— Set initial price target at $47 for a potential 27% gain in 90 days

This article was originally published at ProfitableTrading.com:
Supercomputer Stock Could Rally 25%-Plus in the Next 90 Days

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