If you cannot draw a Trend-line you should not invest in the stock market!
In this section we will examine how to look at price movement and use it to evaluate the stock.
Price is known as the most important indicator and so it should be, when it boils down to it the most important thing is the price.
Here we can see a chart of Broadcom (BRCM), one of the darlings of the tech bubble; I lost plenty of money on this one through inexperience and greed I have overcome both of these personal flaws since 2001.
TeleChart2007 chart courtesy of Worden Brothers, Inc.
Starting from left to right we see from mid-April to July, the stock starts to move in a sideways pattern, known as “Channeling”.
The two red lines show the “trading range”; this is the range between which the stock price fluctuates.
The upper line is known as the Ceiling or the “Line Of Resistance”, and the lower the Floor or “Support”. Both lines show where the number of sellers equals that of buyers.
When the stock price falls through the support line it means the trend has changed, and new market impetus has affected the stock. If you owned this stock in April, and enjoyed the corresponding price rise this break would be a strong “Sell Signal” to the trained eye.
The stock consequently dropped in 2 days, but also had the good courtesy to rise again over the following month to give anyone slow on the uptake another chance to Sell. It broke through the previous support line, but was not strong enough to make it to the upper ceiling of the channel. If you had not got out this time you would have suffered a punishing 50% loss. Enough to make a grown man weep!
The next significant point to note, is in mid-October, when the stock bounces at about $13, clearly oversold and proceeds to make a very nice looking “Double Bottom” or “W” bottom.
Chartists the world over recognize the double bottom, and those that like to buy on Bottoms would have done. This clearly happened as the stock moved up 38% in 3 weeks.
What can we tell from this chart? Well in April 2008 it shot up and in September 2008 it, like many others began a huge descent.
A chart can really come alive when we add trend lines. The graphic below shows BRCM, with trend lines, superimposed.
Now we are really seeing something interesting.
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