How To Read Stock Charts: Analyzing Stock Charts

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Now that you know why it's important to use stock charts and the basics contents of charts, there are three key concepts you need to familiarize yourself with in order to spot profitable chart patterns. Once you can analyze stock charts using these key clues, you'll be ready to start buying stocks. Once you know why it’s important to use stock charts and the basics of what’s in a chart, let’s put it all together and discuss the three telltale clues to look for when analyzing stock charts. After you familiarize yourself with these three key concepts, you’ll be ready to spot profitable chart patterns — those are the launching pads that kick off virtually all major stock moves. Clue #1: What’s the trend? With just a quick glance at a weekly chart, you can see if the stock’s in an uptrend, a downtrend or just trading essentially sideways. You only want to buy a stock when it’s already moving in the right direction, and that’s up. There’s no need to take the risk of buying a stock that’s clearly heading south. Wait until the stock can prove its strength by rebounding into an uptrend. And when a stock is trading sideways, there’s no clear trend. Again, reduce your risk by waiting for a new uptrend to begin before you buy. Clue #2: What “story” is the price and volume action telling? Charts show you if a stock is being heavily bought or sold by fund managers and other large investors. This is super crucial because it’s these large institutional investors that have the power to push a stock higher…or lower. Figuring out what the large investors are up to is easy. All you need to do is check the price and volume action in the chart. These big investors are managing so much money that they’re too big to hide what they’re doing. So you can literally see what they’re doing by looking for unusual spikes in volume. Think of it this way: when the stock price is up significantly and the number of shares traded is well above average, that tells you fund managers and other large investors are heavily buying. On the flip side, when the stock is down significantly in unusually heavy volume, that shows you fund managers are aggressively selling or getting rid of the stock. Long story short, always check the volume when looking at any changes in share price. That will tell you how serious the buying or selling actually is. Clue #3: Is the stock finding support…or hitting resistance? Think of this like a floor of support or a ceiling of resistance. When a stock pulls back, you really want to see if finds support at key areas, such as a moving average line, a prior buy point or even sometimes a round number in the stock’s price. Look at Nvidia’s chart starting back in 2016, and see how it found support at the 10-week line along its big run. If the stock does find support, it means large investors are stepping in to support the stock. That can be a sign to hold or even add shares to your position if the stock rebounds higher from that support level. But if the stock fails to find that support and crashes right through a moving average, like the 10-week line in heavy volume, that’s often a trigger to sell. It means fund managers are now aggressively dumping shares. The concept of resistance is especially key when it comes to spotting the best time to buy a stock. After a stock forms a floor of support and begins to climb higher, it’ll eventually come up against a ceiling of resistance. That’s a key testing ground: Will it punch through that ceiling in heavy volume? Or will it simply bump its head and come back down? The best time to buy is when the stock proves its strength by punching through a former line of resistance in strong volume — we’ll get more into that later. But all in all, when you’re looking at a stock chart, start by checking these three telltale clues. Doing that will give you invaluable insight into the health and outlook of that stock. Investor’s Business Daily has been helping people invest smarter results by providing exclusive stock lists, investing data, stock market research, education and the latest financial and business news to help investors make more money in the stock market.