How to Read a Stock Chart (Beginner's Guide)

In today's video, we're going to look at how to read a stock chart. Now, we're going to talk about the basics of technical analysis, and that involves understanding the phases of the market, the principles of support and resistance, and how to identify them. And then we're going to talk about, to me, the most important thing that you need to take away every single time you look at a stock chart before you make an investment. To start off, I want to talk about how a stock chart is constructed, and I also want to make you aware of the different time lengths we can use on stock charts to get an understanding of how we should be trading that security. Well, to start off, I want to talk about logarithmic versus non-logarithmic charts, and a lot of people are confused about this. Let's start off with an example of ABC Company. ABC stock is trading at $1 a share. We're going to keep the example simple here. That stock goes up by $1, so it's gone from $1 to $2. Now, you guys know enough about math to know that $1 that goes to $2 is a double. It's gone up 100%. Now, think of it. Now, the stock, after a few years, is finally trading at around $9 a share, and it goes up $1 the next day. Well, if you had a non-logarithmic stock chart, that is, the dollar move when it was trading at $1 and moved to $2 looks the same on the chart. It's the same distance or movement on the chart as from $9 to $10, and that doesn't make sense, does it? So I want you to keep that in mind, that you need to have a logarithmic chart because it proportionalizes the moves as the stock price gets higher. So never use a non-logarithmic chart when you are charting. And I'm sorry to say that on the internet, there's a ton of line charts that you will find where they show stocks or commodities or bonds or whatever it is you're looking at, and they're not logarithmic charts. And they're very deceiving insofar as when we're trying to discover what the trend is and what the support resistance levels are, which we will discuss in a moment. I'll now cover some of the basics regarding time length. So there are different charts that we can use. We can use a daily chart, an intraday chart, a weekly chart, and a monthly chart. And these are all used by traders who are looking at different time lengths for their trading horizons. So for example, intraday charts. That means that you're looking at usually a chart that is broken down into one minute or three minute bars. And we're going to look at how these bars look at in a minute. But just understand that you could be looking at an entire day's movement on a one minute at a time basis. And that's a type of chart that most midterm to longterm investors really don't need to be looking at. But if you're a day trader, that's all you're going to be looking at. So intraday charts are not much use to those of us who are trading for midterm and longterm time horizons. However, daily charts can be of use because they can help us refine our trades on a close-up basis. But we should always start from the longest chart horizon and work our way down to look at a closer and closer view. So we can start off with a monthly chart, which each bar is one month. And we can move closer and closer by looking at a weekly chart and then a daily chart. The monthly chart is going to give you a big picture, maybe 10 years of data. The weekly chart might be five years of data and the daily chart might be a year of data. And you look closer and closer and refine your trade. So understand that they each have their purpose, but you do not want to be using the wrong chart for the wrong tool. In other words, if you're planning on being in the trade for, say, six months, that's your average horizon, I don't think a monthly chart is going to help you much. You probably want to focus on a weekly or daily chart to make your decisions. So we'll take a look at how that works in a moment, but I just wanted to give you some insights as to how you use longer-term versus shorter-term horizons on the charts. So I should finish up by saying that this video series is going to be geared more towards the mid-term to longer-term viewing investor and not so much the short-term speculators. Now let's talk about the four phases of the market. The market moves in base formations where it will go flat, it moves in trends, up or down, and it moves in topping formations. So we call those the four phases of the market. And I number them, I call them one, two, three, four, where the bottom base is one, the uptrend is two, the top topping pattern is three, and then the downtrend is four. You don't really have to call it one, two, three, four, you can just understand that there are periods of time that stocks move sideways, they then move into an uptrend, they can form a topping formation, and then they can move into a downtrend. We're going to look at how that works right now. So this is an illustration of the four phases. And what I've done here is I've illustrated that we've got a base, we've got an uptrend, we've got a consolidating top, and a downtrend. How do we recognize each phase? Well, simple rule. An uptrend, to start with, is signified by higher highs and higher lows. And what I'm using here, in most cases you'll see today, is weekly charts. So we want to see a successive series of higher highs and higher lows. We also want to see that the stock remains above its 200-day or 40-week, they're roughly the same, 200-day simple moving average. You can draw a moving average on most online charting softwares. Now, people sometimes ask me, what charting software should I use? I can't endorse any of them. I can tell you I personally use StockCharts. There is a free version of StockCharts.com. I, of course, get the subscription base because it gives me more tools. But there are lots of free stock charting programs on the internet. I would maybe take a look at StockCharts. There's TC2000, I believe it's called. There's a few others that you can look at and usually get a free sample or a very low subscription price for their basic entry service. I want you to understand that when a stock is no longer making higher highs and higher lows, it is moving into a base. Now, after an uptrend, that base often turns into be either a consolidation within an uptrend and then breaks out higher, or it can turn into a top. Well, how do we know when that top is in? Well, a base by itself is no more higher highs and higher lows. The market's moving sideways. But when we see a breakdown, so I'll zoom in on this and I'll erase a few lines here to help you out. So when we see that the lows, in this case, are broken and we start making a series of lower highs and lower lows, we know that that base was not just a basing pattern in a long series of up-moving trends. This was, in fact, a top. And that's the only way you can really identify a top is when it actually breaks down. But you can catch it early by noting highs and lows. When you see that the market is moving below the 200-day, which it can through a base, so you don't get too upset by the market staying below its 200-day moving average. But what you do need to notice is when we start seeing those successive lower highs and lower lows on the chart and it remains below the 200-day or 40-week moving average. That's a downtrend. You can call it phase four like I do. I like to. Or just call it a downtrend. When the market finally comes to a floor, it stops going down and it moves into another base. And here we go again. No more lower highs and lower lows. And the market may move around the 200-day moving average. It may move slightly below it. It may move slightly above it. But it really doesn't seem to be showing any significant adherence to below or above the 200-day. And then when we see the market begin to take out those highs and make a higher high and a higher low and move into the successive series that we've been talking about, highs and lows going higher, we now have evidence that we've moved into a new bull market. And we look to see that the market has moved back above and is staying above its 200-day moving average and so on. So I hope this gives you an understanding of the four phases of the market where we have periods of consolidation and we identify if that consolidation is going to turn into an uptrend or a downtrend by the way it breaks up or down. Higher highs, higher lows, that's an uptrend. Lower highs, lower lows, that's a downtrend. And where the market is versus its 200-day moving average confirms that trend. Now let's look at an example of a stock that illustrates the four phases that I've been talking about. And this is a chart that I took out of my trading course. This is an example of a company that really has moved beautifully within those four phases. And I think it's a great way of explaining how this principle works. So we're looking at GE and I'm kind of zooming in at GE, which is General Electric. And we're looking at an uptrend here. It's fairly obvious. We have higher highs and higher lows. Now you'll notice I did not put the 200-day moving average on this because at this point I'm going to keep this chart fairly clean. Now what we're looking at here is you can see there was a higher high there and a higher low there and same here. And then the stock made a subsequent high and it pulled back. But this time it pulled back to a lower low because the last low was right here. This low, and if we zoom in, you can see is below this particular low right here. It then did a very short rally. I'm going to delete and you can see this small rally. And then it came in and produced a much lower low, followed by a high that again was lower than the peak price. So it's a lower high and a lower low that we're looking at. The stock went on to plummet, made another lower low, rallied back, another lower high. So we knew at this point that that was the top. That was the topping base formation. And instead of breaking out positively, it started moving down. So now we know that we're in a downtrend. So to erase my lines that can confuse the eyes a little bit, we now start following our highs and lows. If we were watching the 200-day moving average, we would have noticed that the moving average looks something like this. And then the market moved below it. Now what you would probably find is the market is moving below the 200-day as it makes its successive lower highs and lower lows. And then at some point, it puts in the final lowest low and the final lowest high, and then it breaks out. Well, here we have a high here and another high here that are roughly even. We are starting to see evidence that we are in a consolidation period at that point. We are now going to be looking for if the market can break the last high and last low, the last peaks and troughs, I should be calling them. So there's a peak. There's a trough. There's a peak. That's higher. There's a trough. That's higher. We now have evidence that GE has gone from a downtrend to a base to a new uptrend. So in the meantime, if we were to look at our 200-day moving average, it's going to look something like this. So long as we don't see lower highs and lower lows, we're in an uptrend. Now let me just show you an example of a period where the market has consolidated for a while in the middle of the uptrend, and that's right here. You can see the highs here, the high here was higher than the next high, but the lows were not getting lower. The lows, in fact, were finding a base. And we'll be talking about the principles of support and resistance coming up. Whatever the case, we have a chart that's showing us support is making relatively similar peaks, and that means the market at this point was just consolidating. It's not until you see a breakdown or a break above through new peaks or new troughs to lower or higher points that we can suggest that something has changed. So GE consolidated for a while, and then lo and behold, took out the previous peaks, took out the previous trough, the bull market was still in place. But wait, let's zoom in some more. What happened here? Higher high, higher low, higher high, lower low, lower high, lower low, lower high. Now we've moved into a new downtrend. I can guarantee you at this point, the market has moved below the 200-day or 40-week moving average, and we now have evidence of a new downtrend, and so on. So I could continue to show examples here. You'll see that the market moved down. It actually moved down quite strongly in 2008. It made a series of consolidation patterns. The market moved up through higher highs and higher lows, new uptrend, consolidation, new downtrend, on and on. So I hope that example of GE gives you some insights on how you're going to spot basing and trending markets. Now let's take a look at the S&P 500. And really what I'm going to focus on here is just the way the moving average does add additional evidence to whether the market's in phase 1, 2, 3, or 4. The green line on this chart is the 200-day or 40-week moving average. So what we're seeing here is obviously the uptrend coming into 2001. So this is 2001. So there's a series of higher highs and higher lows, and the market was supported by the 200-day. Now rather than focus on the peaks and troughs like we were doing in the last chart, I'm just going to focus on the 200. So you can see that there was a change in peaks and troughs, and the market moved below, and in fact, if we zoom in on this, the market moved below its 200-day or 40-week moving average. So you can see that the 200-day offered evidence that the market was about to move into a new trend. Same thing here. No more lows and highs that are getting lower, and the market moved above the 200-day moving average, 40-week moving average. And it generally supported the trend, even though it would spike down below. But we're looking again for the two conditions before we make a decision to move out of the market. And those two conditions are, did the market make a lower high and a lower low, and did it crack its 200-day moving average? And in this case, even though we saw plenty of examples of tiny spikes below the 200-day, we were not making lower highs and lower lows, and we were not breaking the 200-day in a material way. The next principle I want to talk about is when we are looking at our rules of making higher highs and higher lows, is that we need to have a filter for what I like to call head fakes, and that is movements where the market has overshot the moving average and possibly taken out a low. So let's take a look. Here we have an obvious uptrend. Well, you're making higher highs and higher lows, but on occasion, the 200-day moving average is taken out. You can see that right here, right here, and even small spikes like here and here. So you do not sell if the 200-day is taken out. That is not your sell signal. You sell when you have a lower high and a lower low and a break of the 200-day moving average. So this is going to save you for all these spikes below the moving average that might fool you into reducing your equities and then getting whipsawed as the market moves right back up. Now, I'm going to zoom in on the most recent market pullback, which was 2022. That was a legitimate bear market, and value trend, as always, followed our trading rules by selling out when we got a lower high and lower low in 2022. So you can just see that in this case, instead of doing a head fake and then moving right back up, we had a lower high, a lower low. It moved below the moving average, and we, at value trend, counted three weeks before we began selling. And in fact, we let it fall, rally, and it did not move back above this high, so we began selling, and we began legging out at that time. So just understand that short moves below the moving average are not necessarily going to tell you to sell. They're just a supplementary indicator to the basic principle of peaks and troughs getting higher or lower. So hopefully you understand this concept that the moving average is a tool to be used in conjunction with the trend rules of peaks and troughs, but not in lieu of those basic rules. Now let's take a look at how to draw a trend line on a chart. Well, we understand the principles of peaks and troughs getting higher or lower. So what we can do is we can draw a trend line, as I have on this diagram, of peaks, in this case, getting lower, troughs getting lower. And when we have a successive period of at least two peaks and troughs getting lower, we can confirm that that is a downtrend. And in the case of an uptrend, same thing, higher peaks, higher troughs, two in a row, that's an indicator of an uptrend. At least that's the rule I use. When we have no higher highs and no lower lows here, then we are in a consolidation. So we draw a trend line in a downtrend that runs along and touches the peaks. And you'll find, generally speaking, that when we're in a downtrend, the market will rally back up to a lower high, but if you've extrapolated your trend line a bit into the future, you'll find that the movement of the market will actually come back to the top of that trend line. Same thing with an uptrend. We draw it along the troughs this time, higher highs, higher lows, and the troughs are supported by this trend line. And you will find during an uptrend that the market will often pull right back to your extrapolated uptrend. And I use this as a way of finding buy points when a market is in an uptrend. If the market is pulled back a bit and yet it's still supporting at the uptrend, I often use that as an opportunity to add to a position. Next principle is the principle of support and resistance. And you saw this during the basing phases. Now remember, you can see a base that's within an uptrend, it might move sideways for a while as we saw on the GE chart earlier, or you could see a market in an uptrend base and then break that base to the downside. Well, we need to understand why that base occurs and actually how to trade it. So the idea of support and resistance is that investors identify a point where they like this stock. So let's call this stock, just for argument's sake, $10 at support. And we're going to call it, just for argument's sake, $20 at resistance. So what happens is investors bought this stock at $10 and they watch it go to $20. Now remember, there's always a trade on each side. So an investor buys the stock, but somebody else sold it to you and vice versa. So somebody here bought it at $20, somebody here sold it at $10. Well, they're hoping, in this case, the person that bought it at $20 to get their money back after it falls to $10. So meanwhile, investors who missed the trade at $10 are wishing the stock would fall to $10 so they could buy it because they missed it the first time. So that's support. So what we're having is a battle between the bulls who want to buy it if it gets cheap enough and the bears who maybe bought it at $20 and don't want to own it anymore. So when they see it rally back to $20, it causes sellers, those people that paid $20, what would you think? If you paid $20 for a stock and you watch it fall to $10, you're probably thinking, if I could only get my money back. Well, as soon as they get their money back, there's a certain number of investors that will sell the stock at $20 and vice versa. People that missed the trade the first time, they always say, oh, if I could have only bought it at $10. Then they see it fall to $10, they remember and they buy it. So over and over this happens. Eventually a stock can often break out and then sometimes even move into a new consolidation. Well, people that bought the stock this time, because again, the original people that bought the stock at $20 watched it fall to $10. The next time it went to $20, they sold, but somebody else bought it at $20 this time. And those people are saying, gee, that was a bargain because it moved from $20 and in this case to $30. I'm going to call this $30 just for fun. Well, again, you now have people that remember when it was $20 and are saying, gee, if it ever moves back to $30 or sorry, I should say, if it ever moves back to $20, I'm going to buy it. So this is the principle of support and resistance. There's always people who remember what they paid and remember what they bought. And that is why old resistance becomes new support because when it moves above that level, there's a new set of investors that wish they had bought it in this case at $20 and on and on. I hope that helps you understand the principles of why support and resistance exist and also how sometimes old resistance can become new support if the stock breaks up. So let's take another live example. Again, I pulled this chart out of my online trading course because I think it's a good example. In the online trading course, there are many, many, many charts that I look at just to help you understand the concept. I tried pulling out the easiest one from the course just to help you understand this principle. So here we have Acon Group and it's during the mid era between 2016 and 2021. And you can see that Acon was trading, I think this is around $12 or so, and it would bounce off of that. Sometimes it would spike below and you've got to be careful with the spikes because again, I use my rule of three. If the spike lasts longer than three weeks, I'm not interested in the trade. However, I give it three weeks to do that and you can see one, two, three bars and move back up. Whatever the case, I want you to concentrate on this approximately $12 level that on occasion it breaks, but it tends to stay at around $12 and it tends to move up to around $17. So we're going to call support $12, resistance $17, and this happens over and over. So it's interesting because one of the trades I like doing is buying near support on a successful bounce. So I wait for it to move up before I buy like it did here. So if we look at the touch support at around that $12 level, it moved up, didn't retrace to below resistance or support, I should say. So up it went and it was a great trade and I had noticed that it had resistance say around $17, so we would sell it here. And in fact, ValueTrend did this trade numerous times over this time period. Well, this was the COVID crash and sometimes you have to use common sense. If the market is in free fall panic like it was during 2020, during the COVID crash, everything moved down and it wasn't an individual problem with ACON, it was a problem with the market. So you could forgive this spike below support. And what's interesting is once the COVID crash was over, you can see the stock once again found support around $12. Now here's what happened. The stock moved up to $17 as it had many, many times before. It found resistance, but this time broke out. And instead of breaking out like it did here only to fail, it broke out, tested the old level of $17 and moved up, tested again. And I can tell you from current history, it moved up and moved in here in the long term. So now you can see that old resistance at around $17 became new support on the chart. It started moving up and down around $17 with a high of around $20. So now you can see how the market tests support and resistance levels and why they remain in place. So I promised at the beginning of the video that I would give you the most important thing to know and understand about charting. And that most important thing is an old rule that I was taught by my original teacher in technical analysis. I was very fortunate very early in my career to be taught technical analysis by what some people consider the greatest technical analyst out there. That could be argued, but I will call him the greatest technical analyst. It's Ralph Acampora. And Ralph has been, he founded the Market Technicians Association. He has been integral in the development of technical analysis over decades and decades. And I was just very lucky to be introduced to him. I spent a week in a classroom, went to lunch with him personally. It was just a great experience. And the most important thing that Ralph taught the class was never predict what the stock's going to do. Only ask what it's doing. So don't ask what it's going to do. Ask what it's doing. Because we only know that it's trending up, it's trending down, it's basing. We don't actually know what it's going to do. So when we see a breakout, we can say it has broken out. And so long as it remains that level, we can go with the trade and say, yeah, it's a new uptrend. So I just really want you to understand that our job is not to predict. Our job is to prepare. So let's review the rules that we talked about today. Remember I mentioned two successive highs and lows indicate an uptrend. The reverse is true. Two successive lows and highs, peaks and coughs, call them what you will, is a downtrend. A lack of either of those conditions, in other words, no new highs, no new lows, just the market's kind of wavering, that's called consolidation. That consolidation is going to turn into an uptrend if the market breaks out to the upside. In other words, it takes out the last low and the last high. The consolidation is the beginning of a new downtrend, possibly, if it takes out the last low and high to the downside. So pretty simple stuff. But you need to understand that when you're looking at a chart, because you're operating in real time when you're looking at charts. And the most important thing is to keep an eye on those peaks and troughs. So again, the other thing to keep in mind is that old support levels and resistance levels are to be respected because they're often tested in the future. So always eyeball support and resistance levels on the chart that you're looking at to get an idea where the stock might find potential resistance or potential support of the current price. Well, thanks for watching this video. I hope it helped you with your understanding of the basics of understanding a chart. If you want more information and more detail on this, I do encourage you to take a look at my online trading course because I'm really trying to skim the surface here to give you the basics. Now, I'd still appreciate in the comments if you have any comments on what you liked about this video or what you might want to see in future videos. Again, always looking for your input. And I'll catch you in the next video where we're going to talk about the next step in looking at charts. See you then.