Connecting the Dots
Stockscores.com Perspectives for the week ending October 27, 2007
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In this week's issue:
Reading chart patterns is a lot like the childhood game of connecting the dots. Any investor can learn a lot about a stock and where it is probably going to go in the future just by breaking the chart down in to pieces and drawing lines between them. Here is what you need to do.
First, you have to understand what an inflection point is. An inflection point top occurs where stock price stops going up and starts going down. Inflection point lows can be seen at the point where the stock stops going down and starts going up. Look at a chart and draw dots at the highs and lows, the inflection points.
Now, take out a ruler and try to connect the dots. Look for a way to draw a line that can go through the dots at the tops. Do the same at the bottoms, the inflection point lows. Some lines will be longer than others and you may have lines inside the range of others. What is important is how price moves around those lines and how the lines relate to one another.
Chart Pattern Rule 1 - if the line across the inflection point bottoms is rising from left to right, the buyers are in control of the market.
Chart Pattern Rule 2 - if the line across the inflection point tops is falling from left to right, the sellers are in control of the market.
Chart Pattern Rule 3 - if the line across the tops is converging toward the line across the bottoms then price volatility is lessening over time. Lowering price volatility in a sideways price pattern means that the buyers and sellers are coming to consensus on the value of the company.
Chart Pattern Rule 4 - the line across the inflection point tops is called resistance. It acts as a psychological ceiling price for investors.
Chart Pattern Rule 5 - the line across the inflection point bottoms is called support. It acts as a psychological floor price for investors.
Chart Pattern Rule 6 - a breakout occurs any time a stock's price breaks up through resistance. Ideal breakouts are from sideways ranges of lowering price volatility with higher volume supporting the breakout and rising bottoms before the breakout.
Chart Pattern Rule 7 - a breakdown occurs any time a stock's price breaks down through support. Ideal breakdown are from sideways ranges of lowering price volatility with falling tops before the breakdown.
Chart Pattern Rule 8 - a break of support where support is rising from left to right is a break of an upward trend line, an indication that the buyers may be losing control of the market to the sellers.
Chart Pattern Rule 9 - a break of resistance where resistance is falling from left to right is a break of a downward trend line, an indication that the sellers may be losing control of the market to the buyers.
Chart Pattern Rule 10 - the patterns created over the longer term or more important that those that stand up in the short term.
It is possible to draw lines on the Stockscores charts. Here is what you have to do:
First, set your chart to Interactive. To do this, click on the charting tab, change the button to Interactive and click on Create Chart
Once in the Interactive chart, select the Draw Lines button at the top of the chart. Then, hold down the left mouse button while you draw the line across the chart. When you are done drawing the line, release the left mouse button.
This simple approach to reading a chart will tell you everything that you need to know about a company, what the market thinks about it and where it is likely to go in the future. Breaks from sideways trading through resistance are an indication that the buyers have found a fundamental reason to pay a higher price for the stock. Abnormal price breaks with abnormal volume from sideways trading where price volatility is low often leads in to an upward trend. Other combinations of the rules above produce different patterns that have predictability. These patterns are all taught in the book and online videos that make up the StockSchool Pro home study course, now available to Canadian clients of DisnatDirect, an online brokerage (for information, go to www.disnatdirect.com/stockscores)Back To Top
This week I scanned using the Stockscores Market Scan for stocks making abnormal price gains on abnormal volume with a minimum number of trades of 100 and a Sentiment Stockscore of at least 50. Here are a couple of charts from the scan results that I like.Back To Top
1. CVG
CVG is breaking from an ascending triangle pattern, breaking through short term resistance at $18 and appears likely to move to the next level of resistance at about $24.75. With support at $a6.75, that gives it about $6 of upside and $2 of downside, a nice 3:1 risk reward ratio.
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2. WFR
WFR is breaking from a lengthy consolidation period on abnormal volume, a signal that it wants to go higher. I am not crazy about the distance from entry here down to support at $57.20, I think I would like it more on a pull back so that the risk of the trade improves. The stock is in a rising channel pattern on the weekly and the top part of the channel may bring some resistance, another reason to consider on a pull back rather than up here.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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