103-17 Stock Chart Trend-Lines

Introduction

In this section, we take a look at charts and learn how to draw trendlines. Trend lines are a useful way to help us envisage support and resistance areas in a stock price. We then take a look at chart patterns and what they mean. We look at all the major chart patterns. Then we look at gaps in stock prices, the types of gaps, and how to act on them.

Trend lines

This section will examine how to look at price movement and use it to evaluate the stock.

Price is the most important indicator, so it should be when it boils down to it; the most important thing is the price.

Trading range & the double bottom

Here we can see a chart of Broadcom (BRCM), one of the darlings of the tech bubble in 2000.

103-17 Stock Chart Trend-Lines - 1

Starting from left to right, we see from mid-April to July, the stock begins 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 the ceiling or the “Line of Resistance,” and the lower line is 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 the 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 and 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 gotten 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 worldwide recognize the double bottom, and those who like to buy on Bottoms would have done. This 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 vast descent.

A chart can come alive when we add trend lines.

 

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