Since this is supposed to be a learning thread for swapping ideas, here it goes.
When trying to interpret a chart I will do 3 things
1. Look at the long term chart (2-5 years) and find major support and resistance levels. It is the relative concentration of buyers and sellers that determines the price level. A support area, then, is one in which sellers become less enthusiastic or less willing to part with their shares and buyers, at least temporarily, are more strongly motivated. People often make the mistake of only looking at the day chart or maybe the 2-5 day chart. However investors have long memories and large support and resistance levels can last for several years. Never underestimate the power that a long term resistance or support level can have on a stock. If the chart is approaching a major historical support level note that number and draw it on the day chart. I assume that this line will act as the ultimate support/resistance until proven wrong. Of course I give some flexibility to these lines but when they are broken decisively on volume I never ignore them no matter what signals the day chart might be giving me.
For people that don't believe that charts have long term memories I offer up RCI.B, a stock that I have day traded/swing traded several times in the past couple of months. On 11/01/1993 RCI.B hit a major resistance point of $24.75 which was its all time high. During the past few months I have been trading this stock knowing that $24.75 was a major resistance level. Sure enough the stock bounced off $24.75 on Feb 5, 8, 19, 22 and 25 without ever going above this price. On March 4 it close above $24.75 ($25.35) for the first time ever on huge volume. If anyone remembers, I bought on that day and posted I was holding overnight. The next day it gapped up and ran to $27 and proceeded to run to $29.25 over the next couple of days. Once a major resistance level is broken on volume assume it becomes support.
When looking at the long term chart I also look for any major technical patterns that may be forming and if today's trading is confirming a medium term buy/sell signal. For example, the long term chart has been forming a descending triangle for the past 5 months and today's price is showing a breakout to the upside of the triangle on volume. This will help me determine if I want to hold the stock overnight and also help me determine how powerful the upcoming move during the day might be.
In the case of GLE this approach is not that helpful because the stock is trading in uncharted territory. However most of my day trades are on stocks with long and volatile histories.
2.Bring up the 10 day chart. Draw in major support and resistance lines and also draw in trend lines. The more peaks hit by the trend line the more powerful the signal it gives when broken. Look for general well-known technical pattern (e.g double bottoms/tops, head and shoulders, coiled springs, etc. etc.). For people that are not familiar with all the patterns I suggest you go to hardrightedge.com and do a lot of reading. A lot of times people are looking for patterns on the 1-day chart but forgot what has happened for the past couple of days. A good example is GLE on Tues/Wed. If you look at the 5-day chart you can easily see a double bottom at $7.20. This formed a neckline at around $8.20-40. The two approaches are to buy when the neckline is broken or buy when it pulls back and bounces off the neckline. If anyone remembers I posted I would only buy in on Wed. afternoon if it bounced of the neckline. When it bounced I bought at $8.50 and sold a couple of minutes later for $9-$9.10. However if you were not looking at a chart for at least 2 days you would have never known that a double bottom and neckline had formed. There are tons of patterns to look for in a chart and the more you trade and the more you read the easier it is to pick them out.
3. Now that we have a good feel for the stock we can use the day chart and concentrate on every tick. I always use candlesticks on my charts. I have made four cheat sheets containing around 60 of the most popular candlestick formations. However I no longer have to use these sheets since I now have almost all the patterns memorized. I often will look at the charts as 5 minute, 10 minute and 15 minute charts to get a different perspective on the candlestick/pattern formations. It would take to long to go into all the details about trading on a day charts right now. However in regards to GLE…one of my major rules is to never hold a stock overnight if there is downward momentum for the last 10-30 minutes of trading. In around 80% of cases the stock will gap down the next morning. Although I miss the 20% that gap up the next morning I save money 4/5 times.
Lets turn this into a true learning thread...why doesn't everyone spend a little time and right down some of the techniques they use. I will add more later one.
Best Regards
KEITH
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