Wednesday, November 10, 2010
SEE THE PICTURE AND TELL THE STORY
Charts are Graphical representation of price movement of anything over a period of time. The trend depicted by these charts is governed by the forces of demand and supply. ‘History Repeats’ is a dictum that is operative in the markets also. Markets include all kinds, such as Stock, Commodity, Crude, Metals, and Foreign exchange etc.
I have started using names for the patterns in the charts. Watch them with attention.
Market Lesson 1 : Buy on the Breakout
What is a Breakout?
A price movement going above an identified previous level of resistance - which is usually followed by heavy volume and increased volatility.
Let me classify the Breakouts into four categories based on the duration. (Duration refers to the time taken by the stock/commodity/Metal/crude etc to cross the previous top.)
1. Running Breakouts – Short duration – Less than a month during the course of an UP Trend
2. Short term Breakouts – Short duration – Between three months to one year after a correction
3. Long term Breakouts – Long duration – Between one year to three years after a correction
4. Historical Breakouts – Long duration – After several years of correction.
* Failing short term breakouts
Sometimes the short term breakouts will fail to sustain. This will signal trend reversal. Highest level of caution is required at this level. Better to sell stocks and go cash.
** Note: Running and short term breakouts are meant for short term investors.
Long term and historical breakouts are for long term investors.
I have named “the breakout made by a stock or an index after a four top formation” as a classic breakout. This becomes more powerful when it forms as long term breakout.Mr. G.R. Mansukhani has mentioned this type, in one of his newsletters. Such a breakout will take the index or the price to dizzy heights. Every investor should look for stocks which form such a breakout to invest.
Where to look for Charts ?
There are many websites which are providing EOD (End of the day) charts free for all listed companies. You can look into such charts for patterns in stocks.
Today’s Exercise: Search the web and look for charts of companies forming ‘four top formation’
About the charts: (Dated 10.11.2010)
* To enlarge the chart Double click by keeping the cursor above the chart.
1. Historical Breakout - Gold Chart
Gold investment in 2008 might have proved more profitable
2. Long Term Breakout - Garden Silk Mills Chart
From 122 it has moved fast to 151 –
Possibility of further up movement is likely - of course with Corrections.
3. 4 top formation and break out – Siyaram Silk Mills
See the quick huge movement after the breakout.
1. Is Stock Market a place for gambling?
Answer: NO and YES!
The answer is no if you are going to be an investor.
As a long term investor you are becoming the part owner of a company, indirectly giving jobs to many needy people, helping a nation’s economy and per-capita income to grow. In short, your investment in a company is a nation building process.
The answer is YES if you are going to be a day trader.
Day trading is equal to gambling. You want to make money every day. It is like going to a Casino and trying to play a card game without knowing the tricks of the game. Majority end up in losing money. Totally avoid day trading.
“Be an investor in good companies. Help your nation to grow stronger”.
NOTE: To read older postings – look for the archives on the right side. Place the cursor above the respective postings and then click. I am planning to post only on Thursdays (Chart Watch) and Sundays. Spend few minutes every week, follow it and try to understand what I am teaching. This will take you into the fascinating world of investments.