3 tools used by technical analysts that can give stock pickers a second opinion
If there were ever a time when you needed a “second opinion” on your stock picking research, this market is it. Wall Street is fickle. One day, AI is the greatest thing ever ( Nvidia ), and stocks surge. The next day, AI is going to ruin the businesses of enterprise software ( Salesforce ) and financial firms ( Wells Fargo ), and stocks sink. Some hyperscalers get away with plans for big AI spending increases ( Meta Platforms) , others don’t (Amazon) . All the while, investors are cashing in on last year’s tech winners and rotating to the sleepy parts of the market ( Procter & Gamble ). Don’t even try to handicap the Federal Reserve’s next move, and what will happen in a matter of months when the central bank gets a new leader. Here at the CNBC Investing Club with Jim Cramer, we use fundamental analysis, rather than technicals, to try to make sense of it all. That means decisions about which stocks make it into the portfolio result from a heavy focus on the companies’ businesses — studying supply chain dynamics, end market demand, management styles, growth prospects, economic influences, and so on. By studying these fundamental factors, we aim to estimate future earnings and cash flows, as well as an appropriate valuation for the shares in question. Technical analysts focus on stock charts — looking at moving averages, volume, and relative strength indicators, among other indicators, that are often referred to as the “technical setup.” Simply put, we care more about the business fundamentals than the stock. A technical analyst doesn’t care about the business; instead, they focus on the supply and demand of the actual stock. We prefer the fundamentals because technical indicators work until they don’t. The knock on fundamentals, to be fair, is that they work until they change. However, we would rather try to anticipate changing business fundamentals than predict future stock moves based on their past performance. That is not to say we should ignore technical analysis. Fundamental analysis can inform us about what a rational person should do; the charts can be helpful because they reflect the actions of all market participants, rational and irrational alike. More information is always better for the diligent investor. The recent sell-off in software stocks is a perfect example. Fear that AI would disrupt these profitable companies gripped the market — and in response, investors sold them across the board. Fundamental analysis is what you need to differentiate between those at risk of being disrupted and those that will benefit from AI. However, once you have identified a few targets, a study of the charts may help determine where to step into what is an irrational sell-off. With that in mind, let’s take a look at three basic technical tools that every investor should be aware of. These are some of the first tools I ever put on a chart, and though I’ve learned about a few more since then, these are still the ones that I find to be consistently helpful as that “second opinion” to my fundamental analysts. 1. Simple moving averages (SMA) Moving averages are basic, yet important, and widely monitored technical indicators that help to visualize the overall trend of a stock. A moving average is, as the name implies, an average based on prior closing levels for the stock. It is moving in that every day that average must be updated to reflect the latest period. A 50-day SMA (red on the following charts) represents the average closing price of a stock over the past 50 days. It “moves” because each day, the most recent closing price is factored in, while the oldest closing price, from 51 days ago, rolls off. A 200-day SMA (yellow on the following charts) is the average closing level over the past 200 days, updated each day by factoring in the latest closing price and rolling off the oldest closing level, from 201 days ago. The 50-day and 200-day SMAs are the most popular for longer-term investors to monitor. However, other lengths of time can also be helpful, depending on whether you’re investing or trading and what your intended holding period will be. What we do here at the Club is invest in companies for the long haul. We do not trade stocks in search of short-term gains. While there are many ways to use moving averages, we like to keep it simple and look to them as long-term levels of support or resistance. When the stock is trading above the SMA, then the SMA is viewed as support, or a level that can hold as a near-term floor. When a stock is trading below the SMA in question, then it’s viewed as resistance, meaning that level is going to be hard to break through and continue higher. In technical analysis, the Polarity Principle states that prior resistance, once overcome, turns to support; and vice versa, prior support, once broken, becomes resistance. A stock’s current market price versus these moving averages informs us of key support/resistance levels. Technical analysts may look to use two separate moving averages, in conjunction with one another, to determine where a stock goes next. Notable patterns technicians will call out that use two SMAs are the golden cross (bullish and can indicate more upside) and the death cross (bearish and can indicate more downside). A golden cross occurs when a shorter-dated SMA (such as the 50-day) crosses from below, to above, a longer-term SMA (such as the 200-day). A death cross occurs when a shorter-dated SMA (such as the 50-day) crosses from above, to below, a longer-term SMA (such as the 200-day). An example of this would be our technical analysis from September 2024 , when we called out key levels on Amazon, Meta, Nvidia, and Microsoft based on the 50 and 200-day moving averages. In the case of Amazon, support was found at the 200-day. For Meta, it came in at the 50-day. And for Nvidia, the 50-day didn’t hold, but the stock also remained above the 200-day, instead finding support at a level between the two that we identified based on prior low. Microsoft was below the 200-day at the time of our analysis and we acknowledged that it could prove an area of resistance. However, we did manage to identify a key buy level by analyzing prior support levels. iShares Expanded Tech-Software Sector ETF – 1 year On the flip side, the most recent sell-off in software stocks — as measured by the iShares Expanded Tech-Software Sector exchange-traded fund — is an example of how these moving averages can fail us, with so many names in the group blowing straight through both support levels — and, in some cases, causing a death cross to materialize on the chart. That said, if you believe in the fundamentals, it becomes a question of when, not if, to buy a sinking stock. 2. Volume Volume is how many shares are bought and sold in a given day. It sounds simple, but what that can tell us about a stock is important. Think about every trade as a vote on a stock’s valuation, or price to earnings ratio — whether it is undervalued or overvalued — and in turn, where investors see the stock going in the future. Trades on any given day serve as a sample size of the broader investor population. If a stock is going higher, it’s because investors are “voting,” or showing a willingness, to pay a higher price for a company’s earnings. Conversely, if a stock is going lower, that means investors want to pay less for earnings. With every trade being a vote on valuation, technicians argue that the higher the volume, the more trustworthy the move in the stock. If a move is made on very low volume, then it can’t be trusted because the size of the vote on that day, the sample size, is small and therefore not truly telling of investor sentiment. A move on above-average volume, however, is considered more trustworthy because more of the investor base is voting and the sample size is larger. If shares spike on heavy volume, then many shareholders and market participants do indeed believe that they should be trading higher. Share appreciation is a sign that demand is outstripping supply at the current price level. The reverse is also true. If a stock is selling off on heavy volume, the shareholder base more broadly believes the stock is indeed overvalued. A stock drops when there are more sellers than buyers. That said, polls themselves can be flawed, either because the sample population was skewed in some way, or due to an issue with the polling methodology. The same can be said for volume analysis, which is why we cannot analyze it in a vacuum. If a stock has heavy short interest and good news comes out, some of the buying we see would be considered “forced” if it is the result of shorts closing out their positions. Short-selling is a bet that shares will go lower. That’s important to consider because while a move higher may be warranted, it’s being exaggerated by the forced buying of short sellers. Options activity may also skew the action, as a market maker must hedge against any options sold. While volume is an important “lie detector,” as many technical analysts would call it, we need to consider it in the context of other important metrics, with short interest before the move being a major one. To determine if volume is high or low, we do not care so much about the absolute volume on a given day, but rather how that level of volume compares to past days, or a volume moving average. For example, that sample period can be 5 days, 10 days, 30 days or even longer. Another way to use volume is to determine if a move is losing steam. If a stock is moving higher, but volume is declining day after day, it could signal that the momentum is slowing. As a result, some consolidation or a reversal may be in store. DuPont – 1 year One example is DuPont . The company rallied in early November 2025 following the spinoff of Qnity Electronics . However, more telling than the roughly 14% two-day rally, volume spiked more than five times the number of shares traded in prior days to their highest level in over five years. The move came in the days prior to the company’s Nov. 6 earnings release. Though shares did advance a bit before pulling back slightly, that roughly 14% gain was the start of a move that would see the stock more than double in the following four to five months as the stock quickly resumed its upward momentum. Fast-forward to Feb. 5, we took some profits in DuPont on that rally ahead of what turned out to be solid quarterly results less than one week later. State Street SPDR S & P 500 Trust ETF – 1 year As an example of where volume helped to indicate the end of a move, let’s look at the State Street SPDR S & P 500 Trust ETF back in April 2025, when President Donald Trump announced his “reciprocal tariffs.” We see the SPY, as it is also called, sell off on heavy volume. It then rebounds on heavy volume before starting to settle down as volume declines. What we saw was a volume spike on a mad rush to the exits, followed by a high volume bounce, perhaps the result of short covering due to a slight walk back from the Trump administration on the tough talk. Then, as volume settled down, so too did the price action, and a bottom was ultimately put in. So, the volume served as the indicator telling us when the initial response to the tariff news — to shoot first and ask questions later — was coming to an end. That decline in volume was the signal to start getting money to work. These signals don’t work every time, but when met with a market gripped by fear, where fundamental analysis does nothing to help you determine when to get money working into a market or stock that has become a falling knife, tools like this are often all we have to go on. 3. Relative strength indicator (RSI) This is a momentum metric — measuring both the speed and magnitude of a move. It is used by technical analysts to determine whether a stock has reached overbought or oversold territory. Do not confuse overbought and oversold, which speak to the speed and magnitude of a move in a given time, with overvalued and undervalued, which refer to valuation. The RSI measures momentum by comparing the strength of “up days” versus “down days,” generally over 14 days. This indicator oscillates between zero and 100. A reading under 30 is indicative of a stock being “oversold” and a reading over 70 signals an “overbought” condition. The RSI for individual stocks is kind of like the S & P Short Range Oscillator that Jim has used and trusted for decades to signal swings in the broader stock market. One important thing to remember is that an overbought or oversold indication can be worked off simply by some sideways action. So, the fact a stock is overbought/oversold does not indicate that it must pullback/bounce for that condition to be worked out. In extreme market moves, it can be helpful to consider the RSI in conjunction with what you believe about the company’s fundamentals. We recently saw this with the software-as-a-service (SaaS) sell-off. Take CrowdStrike as an example. We called out this cybersecurity name several times as one to buy during the mayhem. While that call was based on our fundamental view that CrowdStrike is best-in-class and would benefit from AI rather than be disrupted by it, the technical support for when to step in could have been gleaned from a look at the stock’s RSI. CrowdStrike – mid-2019 to present In the midst of the selling, CrowdStrike’s RSI fell to its third lowest level in the stock’s history, going back to the middle of 2019. The move was extreme, and with no fundamental reason, in our view, to warrant it — we understand the AI disruption fears, we just don’t agree. So, to us, it was was arguably irrational. When a move is irrational and extreme, you generally want to be thinking about taking the other side of the trade. By combining technical tools like the RSI with the others discussed here and elsewhere, you give yourself the best chance at successfully stepping into what some might describe as a falling knife, but to you, is a clear-cut opportunity, even if it will require some patience and pain tolerance before being proven right. On Feb. 3, we bought more CrowdStrike on weakness. Bottom line While there are tons of tools that technical analysts rely on to forecast the future direction of a stock, we think these three — simple moving averages, volume, and RSI — are a good starting point for those looking to dabble in the space and seek that “second opinion” of the conclusion they have reached by examining the fundamentals. They are simple, yet widely watched — and, alongside fundamental analysis, can be highly informative. The best part is that they should be available on just about every brokerage platform out there. As you conduct your technical analysis, remember, these technical tools work until they don’t, whereas fundamentals work until they change. So, first and foremost, make sure you like the fundamentals, and second, look for multiple technical support indicators. The more support you have on your side, the better the odds that you make your move at the right level. (Jim Cramer’s Charitable Trust is long NVDA, CRM, WFC, META, AMZN, PG, MSFT, DD, Q, CRWD, PANW . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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