Charts: Courtesy of http://stockcharts.com/
In the following chart a bullish trend is verified by observing the relationship between the 10MA, 20 MA, and 50 MA. A bullish trend is confirmed when the 10 MA > 20 MA > 50 MA.
If the stock has been trending between the Upper Bollinger Band and the 10 MA, I will usually enter my position when the stock gets close to the 10 MA. When you review charts you will see a stock gap higher and then move sideways towards the MA. If you see too much space between the candles and the MA it would be prudent to wait for a return to the MA. It is similar to placing a rubberband around your wrist. If you stretch the rubberband you will see a gap between the rubberband and your wrist. If you release the rubber band it will return to your wrist. The amount of pain that you feel when the rubberband snaps back to your wrist will depend on how far that you have stretched the rubberband prior to release. If you buy a stock that has gapped too high prior to coming back to the MA you may feel a lot of pain. So relax and wait.
On the chart below AAPL seems to trade between the upper Bollinger Band and the 10 MA. As illustrated on the chart in JUL. Bollinger Bands are often utilized to determine an exit point or a trend reversal. If a stock is close to the upper Bollinger Band and the trend reverses. The stock will generally trend lower until it hits the lower Bollinger Band or a MA. Near JUL 29, 2 candles touched the upper Bollinger Band their highs had approximately the same value. They both had tails on top of the body. When I see that pattern I general watch for a pullback. AAPL reversed its trend and fell to the lower Bollinger Band. Notice the Candles at AUG 1 and AUG 6 the tails were at the bottom of the Bollinger Band and the lows had about the same value. AAPL attempted to go higher but the 10 MA and 20 MA acted as resistance. The 10 MA crossed below the 20 MA a bearish signal. AAPL then fell through the 50 MA and the lower Bollinger Band. It attempted to go higher but hit resistance at the 50 MA. AAPL then descended down until it pierced the lower Bollinger Band on AUG 16 with huge volume. The Bulls were able to push AAPL back up to the lower Bollinger Band for the close. The huge volume was a sign that AAPL may have hit bottom and the trend was ready to change. The lows for AAPL the next 3 days remained about the same. A good sign.
The chart pattern formed on AUG 15, 16, 17 is a strong reversal pattern. One worth remembering. AUG 16 gapped down from AUG 15. AUG 17 gapped up from AUG 16. AUG 16 had huge volume with a large tail on the bottom. The Open and Close for the day were approximately the same. If we were really interested in wasting brain cells we might call the candle on AUG 16 a doji. The 3 candle pattern might be called an Island Reversal. But who cares I just think in binary - $$ or no $$.
I drew the Support and Resistance lines on the chart. AAPL was turning Bullish as the 10 MA crossed the 20 MA near AUG 30. A day or two later the 10 MA crossed above the 50 MA. Near SEP 17 the 20 MA crossed above the 50 MA. If you review charts and see consecutive small candles and the 10 MA, 20 MA, and 50 MA close as in this chart. The Stock usually explodes after the breakout. My favorite $$$$ pattern.
On the chart below: Circled are the 2 candles that signaled a possible reversal. You could have prepared your exit points at that this time. Exit just below the 10 MA. Exit just below the 20 MA. Or you could have waited until the 10 MA crossed under the 20 MA. If you are in AAPL for the long haul it probably does not matter. If I save 20 of the 30 points while the stock is going down and re-buy the stock as it goes up I am happy. My Jethro brain tells me I took home an extra 20 points of $$$$. Uncle Jed would be proud.
Below are several entry points for AAPL. I wait until a stock breaks above my buy point with volume. AAPL broke above the resistance line with increased volume near SEP 24 on the chart. If you missed the first day, you could have purchased the next day just above the top of the candle body of SEP 24. This Candle did not have a tail on either end, it also had higher volume than the previous day. This is generally signifies strength in the trend.
If you missed the buy point and you see the large gap - the empty zone above the 10 MA. Just sit back and relax and wait for the stock to come back to you. The OCT 6 red candle tagged the 10 MA. I like to buy on strength so I would have bought OCT 7 just above the top of the red candle on higher volume.
How would you have done if you bought AAPL at either one of the buy points? You bought AAPL after you saw the uptrend, the 3 MA were close and properly aligned, your buy points were above the resistance line.
Lets see what a 20 day hold would have returned, we will look at the close of OCT 31.
Notice how AAPL trends close the 10 MA from OCT 13 to OCT 22. OCT 23 had a nice gap up.
I most likely would have taken some $$$ off of the table and moved on to next trade. If you opted to stay in the position get your exit strategy in place. And watch how AAPL trades as it gets close to the 10 MA.
40 point in 3 week is enough for me, approximately 25%. There is another stock in the market setting up to trade.
The chart below is AAPL on NOV 7, 2007. Notice the consolidation area after the OCT 23 gap up. Tight small candlesticks. Volume is decreasing. You can think of a consolidation area as a storage of energy. When the stock breaks out of consolidation it moves with Momentum. Notice Nov 5 and Nov 7. The bearish candles closed just below the 10 MA. The volume on NOV 7 was higher than the day before. If I were still in this trade I would probably place a stop just below the 20 MA.
The chart below is AAPL, NOV 8, 2007.
On NOV 8 AAPL filled the gap between the candles of OCT 22 and OCT 23.
On NOV 9, AAPL had more negative pressure. AAPL closed just above support at the lower Bollinger Band. AAPL is very close to the 50 MA. If AAPL penetrates the 50 MA then look out below.
On NOV 12, AAPL fell through the 50 MA. AAPL is now below one of our buy points. If you did not exit prior to this drop then you wasted about 30 days of your precious time. 30 days gone with no gains. AAPL will most likely recover back to the 190 area. So long term investors have nothing to fear.
A short term investor such as myself would call this a loss. A loss of gains and a loss of valuable time. Some would say: "You did not sell it so you did not lose." Waiting for a stock to come back to a previous high is lost time and dead money to me. My $$$$ could be working on another trade to make more $$$$.
Study the charts - they are a tool that will help you.
Do charts always work perfectly? - NO!!!!
Does a map always display a detour? - NO!!!!
They both will give you a sense of direction!!!!!!
We all trade and invest differently - use what works for you.
When I hear people say that they do not refer to a chart prior to placing a trade. I always think of the blind squirrel. Put a blind squirrel in a yard full of acorns. Eventually the squirrel will find an acorn.
If I were collecting acorns - I would rather use the tools available to me and collect a bushel full of acorns.
Note : As of NOV 13, 2007 I did not own AAPL.
If AAPL has a volatile day on NOV 14, 2007. I may be day trading. Leaving 16 points on the table NOV 13,2007 was just too much!!!!
GOOD LUCK with YOUR TRADING or YOUR INVESTING!!!
Have a great day!!!!
Jethro
3 Comments:
Thanks for the lesson. Bookmarked.
Thank you Jethro for sharing these chart basics.
Regards,
Shyam
Thanks for your kind comments. I am glad you found the chart info useful. I attempted to provide a starting point. The market is not easy to master. Some think they can read a book on charts in one afternoon and then get rich by using what they just read. They make a bad trade and then are convinced Charts do not work. That is like going to a surgeon who read the book on how to perform a procedure, but does not have any actual experience. I know I would not want to be that book-smart surgeon’s first patient. You need to obtain experience reviewing charts. There is a difference between STATIC CHARTS and DYNAMIC CHARTS. The market is DYNAMIC and therefore you have to determine how your stock behaves with respect to the market action and to the action of other stocks in the same industry. When I enter a position I usually watch 5 other stocks in the same industry with good fundamentals. I watch the charts and the percentage gains and losses per day. If all of the stocks in the sector take a similar hit on a down day – then they just went down with the tide. But if the stock you are in goes down 3% while the rest of the sector goes down 1% review the charts and see if you can find any clues. Did the volume change? On the following day do the other stocks fall 2% while your stock remains steady? Is your stock lagging behind the others in the sector? If you watch your stocks chart action on a daily basis you will be able to detect mood changes. Remember to review the intraday charts. For example – today THU NOV 15, the market tanked the last hour of the day. Pull up an intraday (5 min or what ever you like) chart of your stock and a chart of the market. Do they fall at the same time? Was there huge volume on the decline (panic selling)? Was it steady volume? Were shorts covering the last 3 minutes? You should be able to see this information. The market is not easy, the harder you work at it, the “luckier” you will get!! Buy stocks with good earnings in strong sectors. You do not have to pick the exact top or bottom. Just make a profit!!!! Good Luck!!!!
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