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Now that we have finished with the overview of how to read a stock table, I thought it might be good to continue along the same theme and start on a series on how to read different kinds of stock charts. Again, we’ll be using bigcharts.com as the guide for topics in this series. You will be able to find different charts and play with them under the link titled “Interactive Charting.”
Today, we’ll continue with Price & Volume by taking a look at them visually.
Pretty straight forward correct? Price on top. Volume on bottom. The default chart is set to go over daily results from the previous 12 months. Volume doesn’t seem to have any blatantly clear trends, but it’s very obvious that price has distinct uptrends and downtrends, correct? It’s the principles of these trends that will guide almost every facet of chart analysis and understanding the patterns that seem to creep up in price charts will be the biggest step that you can take to becoming a good stock picker. To start, take a close look at the two charts more carefully and see if you can see any of the tendencies and correlations between price and volume that were mentioned in the previous post, Reading a Stock Quote: Volume & Price. I’ll highlight them further down, but first a closer look at the price chart.
As you can see in this closer look, the price chart is not a continuous line. Actually, day to day “points” are not connected at all. Each day is represented by a distinct vertical line that spans from the lowest price to the highest price of trading that day. There are also two small horizontal protrusions one for the open and one for the close price in that day. In my experience, I don’t often pay too much attention to this unless the daily bar is exceptionally long or if there is a large gap between one day’s bar or another day’s bar. These can be signals of what are known as exhaustion gaps where a stock makes a huge gain on trading after a short run up. Exhaustion gaps usually signal the end of a run and sometimes the start of a trend reversal. An exceptionally wide daily range can also be a signal of investor uncertainty and, if you’re holding it, can be a signal for you to pay some closer attention to the stock.
Now, finally here are a few spots that I have picked out to look at on this stock chart. From left to right, you see a gap up on high volume which signals a short reversal of what was already a short downtrend. Then a few days of relatively high gains but without increasing volume which are followed by a downtrend that leads to the final highlight of a big price loss on high volume which starts a free fall downtrend. Almost as if I called it perfectly in the previous post right?
If you’d like to learn more about basic chart analysis and price chart patterns, check out this article at stockcharts.com. It’s not a bad site to learn about chart analysis and I will likely be using them as inspiration for some more detailed posts in the future, but if you want a jump start I do recommend it!
