Stock Charts, First a Look at the S&P 500
As mentioned in earlier posts in this series, stock charts are an important visual aid in recognizing the general patterns of trading activity that has taken place over a prior period of trading, something useful to know. There are several styles used to convey trading activity that vary slightly in accordance with the information portrayed but they are not difficult to understand. With continued usage, stock charts become a familiar tool useful when first looking into the merits of a particular stock or index. It is not necessary to become too deeply involved in technical analysis to at least recognize a few basic characteristics. I strongly urge anyone wishing to learn how to trade stocks to become familiar with stock charts. A wealth of free information and charts is available at StockCharts.com, do please check it out.
A simple chart example, the S&P 500 activity over two years,
So as an example, let us look at a single simple chart that shows the trading activity for the last two years of a composite of stocks known as the Standard and Poor’s 500 Index, more often referred to as the S&P 500. There are several other stock market indexes and several more S&P indexes, covering different numbers of stocks but the S&P 500 is the index most recognized as representing the broad U.S. economy, serving as a proxy for the entire stock market. The S&P 500 is a list of 500 stocks of leading companies from leading industries. There is a great deal more of interest to the Standard and Poor’s activities and indexes than can be covered here, so let us proceed to the chart, where we will just consider one aspect.
Looking at Stock Charts
The chart below is somewhat distorted on a computer screen, but I hope that it is sufficiently well defined to enable you to follow these comments that describe the main elements it displays. The chart covers the past two-year period of the broad U.S. market. The 24 months are indicated along the horizontal axis at the bottom of the chart and the prices in ascending values are shown on the vertical axis at the extreme right, they are not particularly legible at this scale but that does not really matter for our purpose here.
The other ragged pattern, immediately above the horizontal row of months, looking somewhat like a distant mountain range, depicts the fluctuating trading volume over the period.
Please note: Stock charts normally include many more details than I show in this first chart, we can cover them all later but for now, to keep it simple, the chart below portrays much less data than usual.
A Question for you: What is the main thing that this chart tells you?
The answer is that it clearly shows the market’s primary trends, first down then up. From the far left side it shows that around March of 2008, the broad market fell from 1300 or above to about 650 in early March 2009 when it bottomed out. The market then began a reversal, with a few ups and downs along the way, until mid January of this year, 2010. We can also see that it is currently in a downturn, has been for a few weeks, we can call that a correction, which we can refer to later elsewhere, and this correction, so far, appears to be much like the one that occurred from mid June to mid July of last year, 2009.
But we cannot confirm that yet, eventually the chart will show what takes place and even from this chart, which is not really suitable for the more recent to present short term, we can set some target levels which we can call “support” and “resistance” – but those will be better shown on a six month period chart that we will examine next, tomorrow!
The above chart does show other important information, the 50-day and 200-day moving averages for instance, but those are better referred to on a 6-month or 3-month period chart, nuggets of information for those learning to trade in the stock market that we will deal with shortly.
Our Pretend Trading Portfolio and Watch List – Opening today
For illustration purposes only, our Pretend BUY today was Texas Instruments, Inc., (TXN) 100 shares @ $23.50 for the stock and 5 long option CALLs of April 23 Strike @ $1.63, with a Delta of 62. I will explain those terms soon, but meanwhile it gives us something to watch and TXN in the last couple of days is showing the beginnings of a possible move up. These dummy transactions will give us a chance to also open up Chart of Transactions.
We will put AAPL and GOOG on our Watch List, they are trading sideways right now and we will watch to see whether they break out to the upside or downside, but RIMM also added to our Watch List today is giving an early signal that it might move up but not confirmed with any decent volume.
Next, we will examine 6-month charts that will enable us to make more observations.
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