Charts for Investing - Part 2
Please remember that all information contained in these lessons is for educational purposes only and in no way is to be considered a recommendation by the author. The author expressly recommends that you invest only after speaking an investment advisor who is familiar with your situation.
Finding a decent example chart was tough. I eventually was able to pull one off of Bigcharts.com which supports the information contained in the post.
This is just a simple daily chart for GE with trendlines drawn on it. The red line shows a sharp, short term, uptrend. The blue line shows a more gradual intermediate term uptrend. Finally the green line shows a slightly longer term downtrend. This shows that it is possible for there to be different trends working simultaneously on the same stock. At that point you pay the most credence to the trend most closely associated with the expected time frame for your investment.
One thing I don't like about Bigcharts.com is that they flip the %R so that like RSI, overbought is on top, oversold is on bottom. As you can see in the circled area the RSI and a normal %R (one that is upside down from what you see here) would have converged right at about the point where GE made its turn and started a short term uptrend. This also shows that the indication is not always perfectly in line with the change in trend. In this case it preceeded the upturn in price by a couple of days. This is not terribly unusual and helps to showcase some of the risks involved in trading based solely on charts.
This last example is to show trading ranges. From mid-September through early April, GE was trading in a range bound by the red line on top and the purple one on the bottom. In mid-April, GE appears to have made a breakout to the topside. It has recently retested support in mid-May (which shows that just because a stock breaks through the support or resistance doesn't neccessarily mean that it has made a breakout). Looking back on the chart we can see where the top of a new trading range could be up around the region indicated with the blue line.
Technicals, when combined with fundamentals, can be a very powerful tool. It is absolutely imperative to remember that they are not infallible. The foolproof system has yet to be devised. Your goal in investing or trading should be to attempt to stack the odds in your favor as much as possible. Technicals can help you to do that.
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