This post is a repeat of one I published over two years ago. The title of that July 2014 post was “When you look at the chart, what do you see?” Some of the details might not be current but the idea sure is. So what is the chart’s story?
It’s interesting to read the financial press. They always give a reason for the market’s action. I can almost picture them sitting around and trying to figure out what they are going to say for any given day. So the Dow was up 28.7 pts yesterday, what did they say?
Reuters: “Stocks managed to score modest gains on Friday, but the S&P 500 posted its biggest weekly drop since April as investors showed only mild enthusiasm after getting their first glimpses of earnings.”
Bloomberg: “U.S. Stocks advance as Internet rally offsets Portugal”
MarketWatch: “The U.S. stock market closed higher on Friday after the main benchmarks picked up steam in late afternoon, trimming weekly losses.”
Many Factors
Yes, Portugal was a factor this week and but so was China and Ukraine and Israel and oil and on and on. And when it comes to individual stocks there is a myriad of things that could be pointed to that impact any given stock’s price action.
But in reality I believe it all comes back to supply/demand and market psychology. And that all gets reflected in the chart. Are there surprises sometimes? Yep. But overall the chart is telling a story. So when traders yell out ‘why is the stock down?’ I just shake my head.
Yes, stocks do go down
Who knows? Stocks do not go in one direction. There are two options: up or down. Yes they go sideways but usually it is a pause in a bigger trend. And yes stocks do go down. Look at any chart and you will see that up moves are followed by pullbacks.
I was on StockTwits the other day watching some of the comments on a couple of the trade ideas stocks, FSLR and SCTY. FSLR was down big and someone commented, “why is this down? this is a great stock”. And then everyone goes on to quote all the fundamental reasons why it is a good stock.
It doesn’t matter. It could be a great stock, but that day it was getting sold and the sellers overwhelmed the buyers and the stock went down.
And sometimes stocks get themselves into downtrends. You should try to get yourself comfortable with making money to the downside as well as the upside. As a matter of fact stocks go down much faster than they go up. That is why I like buying options. You have the flexibility to easily go either way.
Chart’s Story
So back to the chart. What do you see? What is the short-term, intermediate and long-term trends? Where is support and resistance? What patterns are there? What is volume doing? Is there any kind of Elliott Wave structure? What is the chart’s story?
The chart will tell a story. Sometimes that story is very clear and sometimes it is kind of muddy and confusing. Stay away from the muddy and confusing.