When you start learning how to read stock charts, you’ll have plenty of questions. What is a stock chart? What’s in a chart? What’s the best way to learn stock chart reading for beginners? Why even use stock charts?
Understanding a few basic concepts and taking a look at Amazon.com (AMZN), PayPal (PYPL), Square (SQ), Nvidia (NVDA) and Apple (AAPL) reveals the answers. Learning how to read stock charts will also help you properly handle newer IPO stocks to watch like Pinterest (INMD), Yeti (YETI) and Olo (OLO).
Learning how to read stock charts may seem intimidating at first. But with some basic tips and a little practice, you’ll soon be using them to find winning stocks, to see how to buy stocks and to spot the right time to sell. Stock charts are a particularly invaluable tool when it comes to navigating news-driven, volatile stock markets.
In this first installment of our series on chart reading basics, you’ll learn what’s inside a stock chart. You’ll also see why it’s important to make chart analysis part of your regular investing routine, helping you find breakout stocks like Nvidia, PayPal, PINS stock, AMZN and Apple stock in the early stages of new runs. And by using charts, you’ll be able to run all your stock ideas and stock picks through a buying checklist and selling checklist.
As a learning exercise, see the warning signs Nvidia flashed as it began its decline in Q4 2018 following a massive 750% run. Once again showing the cyclical nature of the stock market, the chip designer has rebounded from the sharp decline in 2018 to reach new all-time highs. It recently found support at its 10-week moving average, formed a chart pattern and launched yet another breakout.
Be sure to also learn how to spot and properly handle IPO bases. These patterns from newer stocks like PINS stock, Roblox (RBLX), Dynatrace (DT) and CMBM stock have the potential launch impressive gains. But they can also be quite volatile, as many big-buzz IPO stocks, including Snap (SNAP), have shown.
Learning how to read stock charts has been especially important during the coronavirus stock market crash and subsequent rebound. Extreme stock market volatility can create wild, news-driven swings in the indexes. It’s important to stay grounded and look for truly meaningful changes in market trends by relying on fact-based stock charts, instead of opinions and headlines.
Stock Chart Reading For Beginners: Why Use Charts?
The first thing to understand about charts is that they tell you a story.
Is the stock being heavily bought by mutual fund managers and other large investors? Or are these so-called institutional investors dumping shares as fast as they can?
Is the stock finding a floor of support from which it can keep climbing higher? Or does it keep bumping its head against a ceiling of resistance?
You can literally “see” that story as it unfolds once you learn how to interpret the price and volume action. By the end of this series, you’ll be able to do just that.
The second thing to understand about charts is that if you don’t use them, you’re essentially investing with a blindfold. You won’t be able to see what’s really happening with the stock.
We all know share prices go up and down every day. But it’s only by using charts that you can keep those fluctuations in perspective and understand whether it’s time to buy, sell or hold.
An investor who doesn’t use charts is the same as an orthopedic doctor who doesn’t use X-rays, or a cardiologist who doesn’t hook up patients to an EKG machine.
Doctors use these tools to spot patterns and anomalies, and to make a proper diagnosis. Savvy investors use charts for essentially the same reason. They help you understand the true health of a stock, and to spot timely buy and sell signals.
So be sure to arm yourself with the tools of the trade. As IBD founder William J. O’Neil says, “Fortunes are made every year by people who learn to properly read charts.”
Stock Chart Reading For Beginners: What’s In A Stock Chart?
Here’s a quick overview of the basic chart elements and related concepts. As you go through them, be sure to scroll down and check out the charts below for an explanation of the main elements you’ll find inside IBD stock charts.
Price And Volume
IBD charts are divided into two main areas: price and volume (i.e., the number of shares traded).
It’s critical that you look at price and volume together in order to understand the “story” a chart is telling. If you only look at changes in the share price, it doesn’t tell you how serious the buying or selling is.
For example, if a stock falls 2% one day, you might get nervous. But if the volume is far below average, it could be a sign that the larger investors who really drive the market are not selling aggressively. They’re sitting tight, and maybe you should, too.
Conversely, if a stock shows a nice gain but the number of shares traded is unusually low, that could mean it’s just a head fake. If big investors were aggressively scooping up shares, you’d see a big spike in volume.
These types of telltale clues — which you can only spot by using charts — let you see what is really going on with the stock.
Moving Average Lines
The moving average lines simply track the share price movement over a set period of time. But they are absolutely crucial to understanding if a stock is being enthusiastically supported — or aggressively sold — by large investors.
NVDA stock, PINS stock, SQ stock, AAPL stock and AMZN stock — just to name a few — all provide recent lessons on what that behavior looks like.
It’s the big mutual fund managers and other institutional investors who have the buying power to push a stock sharply higher — or lower. And these money managers often use the moving averages as a point where they step in to protect and add to their positions.
But watch out if a stock fails to find support at a key moving average like the 10-week or 50-day line. When a stock crashes below those benchmarks in heavy volume, it often means the stock has fallen out of favor with the big players.
So always watch how your stocks behave when they’re trading around their moving averages. Based on how they act, you’ll know if it’s time to buy, sell or just sit tight.
Relative Strength Line
Want a quick way to instantly see if your stock is a leader or a laggard? Check the relative strength (RS) line, which compares a stock’s price performance to that of the S&P 500.
A sharply rising RS line tells you the stock is outperforming the general market. An RS line that’s trending down shows the stock is lagging the market.
When a stock is nearing a potential breakout, look for the RS line to be rising and approaching or in new-high ground. Such action is a bullish sign of market leadership as a stock tries to launch a new run.
What’s In A Weekly Stock Chart?
What’s In A Daily Stock Chart?
Daily Vs. Weekly Charts
Newer investors often ask, Should I use daily or weekly charts? What’s the difference between the two?
The short answer is use both.
The weekly chart gives you a longer-term perspective on the stock and its underlying trend. It also helps smooth out the daily price fluctuations so you can stay grounded and not get overly swayed by day-to-day volatility.
The daily chart gives you a valuable look at the price and volume action at specific, time-sensitive moments, such as on the day of a breakout or when a stock is testing its 50-day line. On those occasions, the shorter-term daily charts help reveal the current “story” and what action you should take.
So be sure look at both the weekly and daily charts. You can easily switch between the two using IBD Charts.
Learn More About Chart Reading Basics
In the next installment in this series on how to read stock charts, we’ll go over in more detail the three key factors to look for in a chart: current trend, price and volume action, and support and resistance.
Once you understand those concepts, you’ll be ready to spot — and profit from — chart patterns like the cup with handle, double bottom and flat base.
Follow Matthew Galgani on Twitter at @IBD_MGalgani.
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