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TheRumpledOne
6,358 posts
msg #46622
Ignore TheRumpledOne
8/27/2006 12:08:50 PM

What You Need to Know about Stock Charts
Stockscores.com Perspectives for the week ending August 26, 2006

I remember the first time someone showed me a stock chart. I was a University student studying Finance and had been indoctrinated with the obligatory financial theory about buying companies with good earnings and low P/E ratios. The guy who showed me a stock chart was a bit of wing nut, discussing waves and patterns and stochastic blah blah blah.

My friends and I secretly scoffed at him but I did follow the stocks he told me to watch. While I had no idea understanding of his methods I did find that his stock picks did what he said they would. Maybe there was something to the charts.

And so began my study of technical analysis. I still believe that many chartists are wing nuts but I do think that any investor can benefit from some education on how charts work. Here is a list of the things that every investor should know about stock charts.

1. The stock chart represents a record of what investors perceive. The stock market is a battle between buyers and sellers and the chart is the scoreboard. It tells a story about how information is interpreted by investors and their emotional reaction to that information.
2. Rising bottoms on a chart represent investor optimism.
3. Falling tops on a chart represent investor pessimism.
4. The highs that a market makes establish a price ceiling that serves as a psychological barrier. This line of resistance is strengthened the more times it is touched and the longer it holds up
5. The lows that a market makes establish a price floor that serves as a psychological barrier. This line of support is strengthened the more times it is touched and the longer it holds up.
6. Breaks through resistance are often the result of new, positive information about the company's ability to make money in the future.
7. Breaks through support are often the result of new, negative information about the company's ability to make money in the future.
8. The more volatile a stock's price movement, the more uncertain investors are about the value of the company. Investors have come to some consensus on what the company is worth when the stock trades with little price volatility.
9. Abnormal price movement or trading volume is a signal that there is a perceived significant change in the fundamentals of the company.
10. Market activity will usually predict significant fundamental change before the news is made public.
11. Trends occur when the stock moves along a sloped line on the stock chart. Like a vehicle in motion, trends have momentum that takes time to reverse.
12. Emotion is a factor in investor decision making if trends become curved rather than linear. The steeper the curve, the more emotion there is in the market. Emotion usually culminates with a significant move in the opposite direction.
13. Longer term trends have more force than short term trends.
14. The market is a mechanism for investors to cast their opinion. Trading volume demonstrates the strength of the opinion.
15. People lie, stock charts do not.

Understanding these things provides a basis for using stock charts to make investment decisions. It is not necessary to know the derivations of the many technical indicators. The stock chart is a picture of what the world thinks about the company, and a picture is worth a thousand words.



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