PUBLISHED MARCH 11, 2005
Business101
By Mary Yanni, The Star-Ledger
Stock charts
S
tock charts are everywhere — newspapers, magazines, online. At their simplest, they give us a bird’s-eye view of how a stock’s price has been moving. When they are more complex, they are great tools for investors looking for clues to where a stock is heading. Anyone can make these charts at a free Web site such as MarketWatch (and its sister site, BigCharts.com) or Yahoo Finance, or through an online broker.
We aren’t advocating trading based only on what the charts tell you — that’s technical analysis, and it isn’t for the average person. But analyzing charts in addition to the fundamentals of the company — how it’s doing financially — gives you another valuable decision-making tool. Charts can help you spot the start or end of a trend before it happens. Here we use charts for Apple Computer over the past 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. APPLE COMPUTER STOCK TO Ticker: AAPL
Gaps: It is common to see a big gap between one day’s trading range and the next day’s — it means the stock’s price range rose or fell dramatically overnight. This is one of the most important things you can see in a bar or candle graph that you can’t see in a chart of closing prices. Each bar encompasses every trade of the day, so the gap means no shares were sold at those prices. It often indicates there was news driving the price. (These aren’t the only gaps on this chart, just two obvious examples.) Breakaway gap: An especially large gap between one day’s trading range and the next day’s can signal the start of a trend and usually is generated by important news — in this case, the introduction of the iPod Shuffle and Mac Mini. To be a true breakaway, the gap has to be considerably larger than the stock’s typical daily price range. Runaway gaps: A series of strongly higher moves like this happens when a trend already is established. Runaway gaps often are followed by a pullback in the price of a stock as investors lock in profit. (The pros look for the pullback so they can “buy on the dip.”) Resistance? When you see an especially long red bar, it can mean a stock that has been rising isn’t going to go any higher, at least not for now.
$45
40
35
30
25
< High Opening > price < Closing price
High > Body > Low >
20
< Low
The body is defined by the open and closing prices; if the close is higher than the open, the body is white (or green); if it is lower, it is red (or black)
15
SEPTEMBER
OCTOBER
NOVEMBER
DECEMBER
JANUARY
FEBRUARY
FEVER LINE
What it is: The most common kind of stock chart plots the closing price each day over time, essentially summarizing each day’s action. Charts shorter than six months generally show daily closing prices; longer time frames will show the weekly or even monthly closes. What it tells you: The big picture — the overall trend of the stock over time. With this kind of chart, the more time it covers, the better.
OHLC
What it is: Each line on this kind of chart encompasses every trade made — the open, the close, and everything in between. OHLC charts can show daily, weekly or monthly action, although they are most useful when you are looking for daily trends. What it tells you: Trends emerge from the bars that you don’t see if you are only looking at closing prices. A classic upward trend shows a series of bars in which each day’s high price is higher than the day before and the low price is higher than the previous day’s low. In a downward trend, you would see the opposite: a series of lower highs and lower lows. Similarly, a trend may be developing 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).
CANDLESTICKS
What it is: This is another way to present the same information as the bar chart, but the candlestick chart uses a visual cue — a color — to tell you whether the stock closed higher or lower than it opened. What it tells you: The color and size of the body of a candlestick give easy-to-read cues. A tall white (or green) bar indicates the stock opened near its low and closed near its high — a bullish sign for the stock. The opposite result is a tall red (or black) bar, which shows the stock opened near its high point and closed near its low, and that’s a bearish sign.
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
APPL SMA (50) $40 30 20 10 0 S O N D J F 50-day simple moving average Stock price
MACD
APPL MACD (12,26)
2.5
MONEY FLOW INDEX
The difference between 26and 12-day EMAs APPL MFI 100 80 50 20
9-day EMA
1.5
0.5
Divergence bars
– 0.5
0 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 chart. The moving average gets rid of a lot of it in order to show a smooth trend. In a 50-day simple moving average, or SMA, each point represents the average of the closing price on each of the previous 50 days. A simple moving average can span anywhere from five to 200 days. You also will see an exponential moving average, or EMA, which gives recent prices more weight — a way of helping investors spot recent trends as they develop. What it tells you: Most traders look for the daily price to break above or below the moving average. The crossover is a signal the stock price is changing direction. You can see Apple’s stock price plunging toward its 50-day SMA in the above chart.
What it is: MACD is short for “Moving Average Convergence/Divergence.” It’s based on the premise that when moving averages of different durations converge, a trend is ending — and that can be a signal to buy or sell. The important part of this chart is the divergence, which is shown in bars (or sometimes a fever line) at the bottom of the chart. What it tells you: Traders look for the two fever lines to cross, but the divergence bars are all the average investor really needs. Each bar represents the difference between the two fever lines on that date. When the bars go below zero, it's typically seen as a signal to sell. Apple’s divergence bars started sending a sell signal early this month — just as its price started to fall.
What it is: Every time a stock is traded, someone is putting money into it. Even during a wild selloff, there’s a buyer for every share — they’re just not spending as much on it as they would have when the stock’s price was higher. The MFI measures how much money the stock is attracting by combining its price with its daily volume. If the price is high but the stock is attracting few investors, the MFI declines. What it tells you: If the price is rising and the MFI is falling, or vice versa, the stock may be getting ready to change direction. The pros look for the price of a stock to peak when the MFI is above 80 and bottom out when it is below 20. Apple’s MFI indicates the stock is heading for a 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