PUBLISHED MARCH 11, 2005
Business101 By Mary Yanni, The Star-Ledger
Stock charts
S
tock charts are everywhere — newspapers, We aren’t advocating trading based only on what the
magazines, online. charts tell you — that’s technical analysis, and it isn’t for
At their simplest, they give us a bird’s-eye view the average person.
of how a stock’s price has been moving. When they are But analyzing charts in addition to the fundamentals
more complex, they are great tools for investors looking of the company — how it’s doing financially — gives you
for clues to where a stock is heading. another valuable decision-making tool. Charts can help you
Anyone can make these charts at a free Web site such spot the start or end of a trend before it happens.
as MarketWatch (and its sister site, BigCharts.com) or Here we use charts for Apple Computer over the past
Yahoo Finance, or through an online broker. six months to illustrate how to read between the lines.
THE BASICS
There are a few basic ways to chart stock prices, and lots of variations on them. The most common are the fever line, which plots only the stock’s closing
price; the OHLC, cleverly named because it charts the open, high, low and closing prices; and the candlestick chart, which includes the same data as the
OHLC, but in a different style. Traders have identified dozens of patterns in OHLC and candlestick charts; we’re just scratching the surface here.
TO
APPLE COMPUTER STOCK
$45 Ticker: AAPL
Gaps: It is common to see a Breakaway gap: An especially large Runaway gaps: A series of strongly
big gap between one day’s gap between one day’s trading higher moves like this happens when a
trading range and the next range and the next day’s can signal trend already is established. Runaway
day’s — it means the stock’s the start of a trend and usually is gaps often are followed by a pullback in
40 price range rose or fell generated by important news — in the price of a stock as investors lock in
dramatically overnight. This this case, the introduction of the profit. (The pros look for the pullback
is one of the most important iPod Shuffle and Mac Mini. To be a so they can “buy on the dip.”)
things you can see in a bar true breakaway, the gap has to be
or candle graph that you considerably larger than the stock’s Resistance?
35 can’t see in a chart of typical daily price range. When you see an
closing prices. Each bar especially long red
encompasses every trade of bar, it can mean a
the day, so the gap means stock that has been
no shares were sold at those rising isn’t going to
prices. It often indicates go any higher, at
30
there was news driving the least not for now.
price. (These aren’t the only
gaps on this chart, just two
obvious examples.)
The body is defined by the
Opening >
open and closing prices;
price
Body > if the close is higher than
lower, it is red (or black)
20 < Low
15 SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY
FEVER LINE OHLC CANDLESTICKS
What it is: The most common kind of stock What it is: Each line on this kind of chart What it is: This is another way to present the
chart plots the closing price each day over encompasses every trade made — the open, same information as the bar chart, but the
time, essentially summarizing each day’s the close, and everything in between. OHLC candlestick chart uses a visual cue — a color —
action. Charts shorter than six months charts can show daily, weekly or monthly to tell you whether the stock closed higher or
generally show daily closing prices; longer action, although they are most useful when lower than it opened.
time frames will show the weekly or even you are looking for daily trends. What it tells you: The color and size of the
monthly closes. What it tells you: Trends emerge from the body of a candlestick give easy-to-read cues.
What it tells you: The big picture — the bars that you don’t see if you are only looking A tall white (or green) bar indicates the stock
overall trend of the stock over time. With at closing prices. A classic upward trend opened near its low and closed near its high —
this kind of chart, the more time it covers, shows a series of bars in which each day’s a bullish sign for the stock. The opposite result
the better. high price is higher than the day before and is a tall red (or black) bar, which shows the stock
the low price is higher than the previous opened near its high point and closed near its
day’s low. In a downward trend, you would low, and that’s a bearish sign.
see the opposite: a series of lower highs and
lower lows. Similarly, a trend may be devel-
oping or strengthening if you see a series of
days in which the stock closes at or near its
highest price of the day (or its lowest).
THE NEXT LEVEL
Now that you have the basics of how to read a chart down, here are three more indicators traders use to signal when to buy or sell.
MOVING AVERAGE MACD MONEY FLOW INDEX
APPL SMA (50) APPL MACD (12,26) The difference APPL MFI
Stock price between 26-
$40 2.5 100
and 12-day
9-day EMA EMAs 80
30
1.5
50-day 50
20
simple Divergence
moving 0.5 bars
10 average 20
0 – 0.5 0
S O N D J F S O N D J F S O N D J F
What it is: There can be a lot of noise in a stock What it is: MACD is short for “Moving Average What it is: Every time a stock is traded, someone
chart. The moving average gets rid of a lot of it in Convergence/Divergence.” It’s based on the is putting money into it. Even during a wild selloff,
order to show a smooth trend. In a 50-day simple premise that when moving averages of different there’s a buyer for every share — they’re just not
moving average, or SMA, each point represents durations converge, a trend is ending — and that spending as much on it as they would have when
the average of the closing price on each of the can be a signal to buy or sell. The important part the stock’s price was higher. The MFI measures
previous 50 days. A simple moving average can of this chart is the divergence, which is shown in how much money the stock is attracting by
span anywhere from five to 200 days. You also bars (or sometimes a fever line) at the bottom of combining its price with its daily volume. If the
will see an exponential moving average, or EMA, the chart. price is high but the stock is attracting few
which gives recent prices more weight — a way What it tells you: Traders look for the two fever investors, the MFI declines.
of helping investors spot recent trends as they lines to cross, but the divergence bars are all the What it tells you: If the price is rising and the
develop. average investor really needs. Each bar represents MFI is falling, or vice versa, the stock may be
What it tells you: Most traders look for the daily the difference between the two fever lines on that getting ready to change direction. The pros look
price to break above or below the moving average. date. When the bars go below zero, it's typically for the price of a stock to peak when the MFI is
The crossover is a signal the stock price is changing seen as a signal to sell. Apple’s divergence bars above 80 and bottom out when it is below 20.
direction. You can see Apple’s stock price plunging started sending a sell signal early this month — Apple’s MFI indicates the stock is heading for a
toward its 50-day SMA in the above chart. just as its price started to fall. bottom — but it’s not there yet.
Mary Yanni can be reached at myanni@starledger.com or (973) 392-1720.
SOURCES: "Technical Analysis for Dummies," Barbara Rockefeller (Wiley Publishing; $24.99); "Stikky Stock Charts" (Lawrence Holt Books; $12); Motley Fool; Yahoo Finance; MarketWatch; StockCharts.com