Stock Charts For Dummies

Chapter 9

Reading a Price Chart

IN THIS CHAPTER

Knowing uptrends and downtrends when you see them

Recognizing consolidation, bases, and topping patterns

Seeing different types of scaling

Reading a chart is part art and part science. Charts give you the ability to analyze what investors are doing, which is better than just listening to what financial reporters, who may or may not own the stock, have to say about the stock. Analysts also fall into this camp. They place a buy or sell rating on a stock they don’t own. When they have no money invested in the company, armchair quarterbacks can see whatever they want to see.

A great example of this phenomenon was Enron. The stock made its final high in August 2000. The topping structure was completed in November 2000. It took 11 months after that point for the first fundamental analyst to put a sell rating on the stock. By December 2001, two months after the first fundamental analyst downgrade, the company filed for bankruptcy. Two weeks before the bankruptcy, six fundamental analysts still had a strong buy on the stock and two reduced their strong buy to hold after the stock had fallen 95 percent.

Technical analysts can still make mistakes, ...