This article discusses
how to read stock charts - stock exchange charts.
Use the daily charts of major market averages published in The Wall
Street journal and many local newspapers to forecast stock market
reversals. Major clue: A gap between the bar line of one day's trading
and the next, an area where no trading took place.
The gap represents an area through which prices are likely to move on
the next market dip or rise. If the most recent gap was formed during a
market advance, there is a good chance the gap will be filled during a
subsequent market decline. If a gap was formed during a recent market
decline, it will probably be filled during a subsequent market advance.
If a gap occurs following an advance or decline that
has already lasted for several days, and the market then pauses, expect
an immediate market reversal back through the gap.
Gaps formed on the first day of a market reversal often signify a strong
move.
Most investors do not have the time to follow the ticker tape closely.
But there are some tape-watching tactics used by professional stock
traders that don't take minute-to-minute observations and can help
predict short-term market swings.
Techniques to consider:
Watch the prices of the market leaders.
See
stock charts
for more information.
They usually change direction ahead of the broad list. Timing: If the
Dow is down for a day, but the market leaders close near their highs,
anticipate an imminent upswing in the market.
To How to Read Stock Charts
Compare price changes in mutual funds at the end of
each day with price changes in the Dow and other major market averages.
If the Dow changes significantly either up or down, but mutual funds do
not show an equivalent percentage change, the Dow is not reflecting the
true state of the market that day.
Good customers can ask their brokers for the final tick each day.
(Truest tick pattern can be obtained at around 3:55 p.m., New York
time.) Goal: Find how many issues traded at the close on an uptick
(closing price was higher than the preceding price) and how many traded
on downticks (closing price was lower than the previous price).
Unchanged trades count as' of the previous price change.
Rules:
If the market closes with a strong plurality of upticks (+200 or so) or
with a rapidly improving tick, the odds are strong that the market will
open favorably the next day. If the market closes with a strong
plurality of downticks, the odds favor a weak opening.
A shift, say from - 200 to + 200 right at the close indicates a
short-term change in market direction.
If a falling market is about to rise, ticks often change from negative
to positive at around 10:30 a.m. If a rising market is about to fall,
positive ticks will turn negative then.
Even a strongly rising market will usually pause for
breath during the day. Expect some tick weakening at around noon and
again at around 3:00 p.m. Investors should use these pauses to
accumulate positions.
It rarely pays to buy into a late tape or when trading volume is running
at the rate of 13 million shares per hour. Prices are often better a day
or so later when the tape quiets down. Be particularly careful about
buying or selling options into a late tape. The worst option executions
take place at such times.
Source: Consumer Information Center
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