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If a Picture is Worth 1,000 Words...
by Kevin MatrasDecember 04, 2009 | Comments : 0 Recommended this article: (0)
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If a picture is worth 1,000 words (as the saying goes), then a stock chart is worth $1,000 (or more)!
Because very often the price action on a chart can form meaningful patterns. These chart patterns reflect the collective buying and selling sentiment of the market. And these patterns can in turn be used in trying to forecast future price direction and the timing surrounding it.
Research has proven that certain chart patterns have high forecasting probabilities.
And these chart patterns can be found in some of the biggest market moves.
Clear Objective Analysis
Charts can also help cut through the clutter and provide sound objective analysis.
Earlier in 2009, when everyone was expecting the stock market to go to 'zero' (OK, not really zero, but you know what I mean), the market was quietly forming one of the most bullish bottoming patterns out there the Inverted Head and Shoulders pattern.
(They call this an Inverted Head and Shoulders pattern because if you flipped the chart around, the silhouette of the pattern would look like a person's head and shoulders.)
Can you see it?
This set up one of the biggest one-year stock market rallies.
This picture was worth way more than a thousand words and way more than $1,000.
If you didn't see it, don't despair.
But now that you see what the pattern looks like, you'll likely never miss this opportunity again.
And these types of formations happen all the time in thousands of stocks every day.
These patterns include the:
- Symmetrical Triangle
- Ascending & Descending Triangles
- Flags & Pennants
- and the Head and Shoulders & Inverted Head and Shoulders patterns
Techniques That Work in Bullish and Bearish (and Sideways) Markets
Chart patterns can be classified into two main categories: continuation patterns and reversal patterns.
- Continuation Patterns
Continuation patterns are called that because they generally will continue the direction of the trend. For example: if a stock is in an uptrend and then pauses or enters into a period of consolidation (i.e. trading is temporarily confined to a well-defined pattern or range), the expectation is that the market will ultimately breakout to the upside and continue the direction of the trend.
If the trend was down prior to the consolidation, the expectation would be for the stock to breakout to the downside and continue in the direction of the downtrend.
- Reversal Patterns
Reversal Patterns have a tendency of reversing the trend. These consolidation patterns can signal a reversal in both uptrends and downtrends.
Once you learn how to spot these different patterns, you'll have just learned a powerful money-making secret that will help you make smarter and more timely decisions.
Dont Forget the Fundamentals
Fundamentals of course are still an important key in ultimately determining the price or value of a stock.
If you have one stock with a bullish Symmetrical Triangle in an uptrend with improving fundamentals and another stock with a bullish Symmetrical Triangle in an uptrend but with deteriorating fundamentals -- the bullish pattern WITH the improving fundamentals will likely have the highest probability of breaking out to the upside and going even higher. The one with the reduced outlook will likely go lower.
So combining both fundamental analysis and technical analysis (chart pattern analysis) makes for a very potent combination.
But the charts can help you determine when the market is ready to react to those fundamentals.
As we all know, just because you've found a solid company, doesn't necessarily mean its ready to go straight up right away.
Chart patterns, though, can help signal future price direction and the timing surrounding it.
The Right Time
Currently, there's an abundance of chart patterns (consolidation patterns) forming in the market right now.
Both bullish and bearish. Continuation patterns and reversal patterns.
And that's because consolidation patterns are basically areas of indecision - pauses, while the market (stocks) looks for additional information or a catalyst to propel a stock even higher or send it lower.
And the market does seem to be at a crossroads. Something big is about to happen.
So now is the time to better understand what chart patterns are forming on what stocks.
The good news is if you've ever looked at a chart before, you've just practiced technical analysis.
Now take your understanding to the next level. Learn what to buy and when to sell.
Chart patterns can help you get long on the right stocks and short the ones ready to fall.
Keep in mind, nothing is foolproof. But a basic understanding of charts and chart patterns will give you an edge in beating the market.
And being able to make money in any kind of market is a great skill to know.
To help you get started profiting with charts, you may want to check out our Chart Patterns Trader service. Follow along as we apply all of the principles above and select the best chart pattern stocks. Both bullish and bearish. Enjoy the feeling of being on the right side of a breakout, and gain a level of confidence in your trading that you may never have experienced before.
This is a particularly good time to look into this because there's a special savings offer that expires this Saturday at 11:59 pm.
Thanks and good trading.
Vice President, Zacks Investment Research
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