Technical Stock Analysis
Cabot Guide to Technical Stock Analysis
There’s more to investing in stocks than just selecting a company with good fundamentals. This is because stocks trade on what the future holds, not last quarter’s financial results. A stock’s current share price reflects the future prospects of and expectations for the company. But that’s not all. Stocks also have memories. The reason for this is that the stock market is nothing more than a collection of individual investors who are busy buying and selling stocks. These investors remember a stock’s past, and this influences their buying and selling behavior.
This is where technical stock analysis comes into play. It can be a powerful tool in identifying trend reversals and entry and exit points. The best way to analyze the trading patterns of a stock is to look at a chart of it. We can’t stress this enough. In fact, we wouldn’t recommend a stock in our newsletter without analyzing its chart first!
If you’ve been reading our newsletters—Cabot Market Letter, Cabot Top Ten Report, Cabot China & Emerging Markets Report, Cabot Benjamin Graham Value Letter, Cabot Small-Cap Confidential, Cabot Green Investor or Cabot Stock of the Month Report—for a while, you’ve probably seen reference to terms like "head-&-shoulders" pattern. Other terms that you’ve probably encountered are: trendlines, support and resistance, double-tops and double-bottoms, triangles and gaps. We'll review them below.
The purpose of this guide is to shed some light on the technical terms above. Having an understanding of these basic chart formations will make you a better, more profitable investor. Timing is everything. Even a basic understanding of technical analysis will greatly improve the timing of your entry and exit points. And this can make a tremendous difference in the success or failure of an investment.
No technical indicator or system is perfect. There will be instances when the signal given is wrong. But in most cases, when technical stock analysis leads you to a certain conclusion, the stock will behave in a way that’s similar to what would be expected. We’ve decided to cover each of the common chart patterns listed above because you’re sure to see each of them from time to time.
Technical Stock Analysis terms you need to know:A double top occurs when a stock attempts to break out above a recent peak but fails.
Here are our general guidelines on earnings gaps.
The "head-&-shoulders" pattern is one of the most common and reliable of all the reversal patterns.
Triangles usually occur when a stock gets ahead of itself and temporary consolidation is necessary.
Trendlines help you determine the prevailing trend of a stock.
RP measures how a stock is performing relative to a specific market or index.
Gaps occur when a stock begins a new trading day at a price that’s vastly different from the previous day’s closing price.
Support is a price at which buyers step in and arrest a decline and resistance is the inverse of support.
When you see tight trading in a volatile growth stock after a big run-up, it's almost always a bullish sign.
Here are four trading volume indicators to keep in mind when you’re buying or selling a stock.
Large increases in volume are your first clue that institutional investors are jumping onboard.