Knowing what to buy and what to sell is important.
But knowing when to buy or sell could very well be the question of all questions when it comes to trading.
Fundamentals of course are ultimately the key in determining the price or value of a stock. And statistics have shown that companies receiving upward earnings estimate revisions outperform the market, while companies receiving downward earnings estimate revisions underperform the market.
But a quick look at a chart can often times give you insight as to when the market is ready to react to those fundamentals.
Just because you think you’ve found a solid company, doesn’t necessarily mean it’s ready to go up as you had anticipated.
How many times have you read about, heard about, or researched a certain stock, determined that the fundamentals were bullish (or bearish) only to then take a position and watch the market go the other way?
What the . . .?
Confused and frustrated, you dump your stock only to then watch it finally go the way you had been expecting from the beginning. And the reasons for your earlier market convictions are now being played out in the news while you stand by wondering what happened.
Brutal, huh?
It happens all the time. But it doesn’t have to.
Seeing Is Believing
Very often, the price action on a chart can form meaningful patterns. These chart patterns simply reflect the collective buying and selling sentiment of the market, and can in turn be used in trying to forecast future price direction and the timing surrounding it.
And research has proven that certain chart patterns have high forecasting probabilities.
These patterns include:
- Symmetrical Triangles
- Ascending and Descending Triangles
- Wedges and Rectangles
- Flags and Pennants
- the Head and Shoulders patterns
What do they all have in common?
Each one of these patterns can be found in some of the biggest market moves.
Learning how to identify them is easier than you think. And it could be worth a fortune.
For example, did you know that months before the stock market began its collapse at the end of 2007, there was a classic bearish Head and Shoulders pattern looming ominously at the top of the market?
Millions of people saw it, even before the market dropped, but unfortunately didn’t know what it meant or what to do about it.
Imagine if you did?
You would have gotten a second chance to spot this when a bullish Inverted Head and Shoulders pattern signaled the bull market’s beginning in mid 2009.
Below is an illustration of a bullish inverted head and shoulders pattern. And beneath it is a chart of the Dow Jones as it was tracing this pattern out and getting ready for its historic rally.
Chart patterns also predicted the recent rise from 10,000 to 12,000+ in the Dow. And they are now forecasting a move to 13,100.
You’ll find classic chart patterns all over the best performing stocks as well.
Professionals have been using charts for years. And they’ve learned the advantages of correctly interpreting these patterns and using technical analysis.
Nowadays, you’ll find that even the most casual trader wouldn’t even think of buying or selling a stock without at least first glancing at a chart.
If you’ve ever looked at a chart, you’ve just practiced technical analysis. But you have to know what you’re looking at.
Putting it All Together
Fundamentally speaking, one of the best ways to find the top stocks is to look at its earnings estimate revisions. Are the analysts expecting them to make more money than previously thought? Or less? This is all revealed in their earnings estimate revisions. And they couldn’t be easier to find than with the Zacks Rank.
Before you pull the trigger though, take a quick look at their chart.
- Are they in an uptrend or a downtrend?
- Is there a bullish chart pattern or a bearish chart pattern?
- Is the stock above its moving averages or below them? Also, are the moving averages themselves moving up or down?
- Is volume increasing on the way up? Or is volume increasing on the down days?
Put together a short checklist. And demand that your stocks meet both the fundamental criteria and the technical criteria.
Look, there are over 10,000 stocks out there. Be picky. It’s your right to. Don’t be afraid to wait for the best set-ups. You owe it to yourself to increase your odds of success.
Keep in mind, nothing is foolproof. But a strong fundamental outlook combined with a good technical viewpoint creates a very potent combination for the trader and investor.
The best part about chart analysis is that it’s very straight forward. The chart action has either formed a certain shape or it hasn’t. The trend is either up or down. The volume is either heavy or light.
No guesswork.
It’s quick. It’s easy.
And it works!
To help you get started charting your way to success, you may want to check out our Chart Patterns Trader service. Follow along as we apply all of the principles above and select the best chart pattern stocks. Feel what it’s like to be in on the right side of a breakout and gain a level of confidence in your trading that you may never have experienced before.
This is a particularly good time to look into this because the service has been cranking out double-digit winners as the market poises for another major move. There’s also a special savings offer that expires this Saturday at 11:59 pm.
Find out more about the Chart Patterns Trader.
Thanks and good trading.
Kevin
Kevin Matras
Vice President, Zacks Investment Research
Kevin is Zacks’ stock screening and technical expert. He runs the Chart Patterns Trader, which combines Zacks Rank fundamentals with price-action timing to pinpoint stocks just before they break out.
