Check the charts occasionally to sense mob hysteria or panic at work

Some people in the markets use graphs of previous stocks or commodity movements in order to predict future price movements.  They are called "technicians" or "chartists."  They spend a lot of time pouring over the historic price movements and the formations these show on their charts as a way to predict what will happen next.

Ordinarily, I do not use charts to trade.  Occasionally, I will turn to them as a way to see what has been happening and to check facts if I sense mob hysteria or panic at work.  

Charts sometimes reveal a beeline rise, an indication that prices have increased far beyond actual value.  It means that people have lost perspective.  It shows the level of the hysteria.  I know that prices will eventually return to the appropriate level, so I sell short.  You need to be careful, though, that you are not selling short simply because prices are high.  Never sell short unless prices are astronomically expensive, AND you detect negative change coming.  

You can see panic in falling prices when you see them collapsing straight down day after day for extended periods.  Historically, long periods of selling have ended in "selling climaxes" when everyone finally panics and dumps to get out of the market at any price no matter what the fundamental reality might be.  Large price declines across the board should attract your attention. 

A good rule of thumb is to sell during times of market hysteria and buy during times of panic.  Always remember to buy low and sell high.


Ref:
Jim Rogers
A Gift to My Children

What every investor must know about stock market charts

March 23, 2010
Posted by: Pat McKeough Filed in: Market Analysis

Technical analysis (or reading stock market charts) can be a useful tool for picking stocks. However, some investors choose to make investment decisions based solely on charts. That’s when technical analysis can lead you to make poor (and sometimes disastrous) choices.

Technical analysis is the process of analyzing a stock’s price movements in an attempt to determine its future price. It focuses on how a stock has behaved in the past, and the clues that could offer about future price movements.

It’s crucial to keep stock market charts in perspective

We always look at stock market charts when we select stocks to recommend in our newsletters and investment services. And some successful investors find it helps to know a little about charts. But if you rely on charts at all, you should view them as just one of many things to consider when you make investment decisions. Here are two reasons why:

1. Technical analysis zeroes in on share prices: The main problem with chart reading is that it is based entirely on a stock’s past price movements. It’s not concerned with other crucial parts of a company’s business, such as financial statements, management strength or conditions in the company’s industry. In fact, an investor who relies solely on charts might buy and sell a stock while knowing little or nothing about the underlying company.

2. Technical analysis is not as consistent as it appears: The appeal of technical analysis is that it often seems to work, at least in small ways, but this may be an illusion. You may only remember your successful chart interpretations. More important, technical analysis tends to work in spurts. The risk here is that you may find it leads you to make five or even 10 small wins, then steers you wrong at the worst possible moment. That next mistaken trade may cost you much more than your winnings to date.

Stock market charts should support — not determine — your view of a company

The key to profiting from technical analysis is to avoid looking to the pattern on the chart for a prediction of what’s going to happen. Instead, see if the chart seems to support your view of the stock, based on its finances and other fundamentals.

It’s encouraging if your analysis and the chart seem to match. But sometimes they don’t. If a stock looks promising, but its chart shows a lengthy falling trend, insiders may know something you don’t. That’s when you have to dig deeper, and perhaps wait until the situation clarifies itself.

http://www.tsinetwork.ca/daily/market-analysis/what-every-investor-must-know-about-stock-market-charts/

Chart Analysis: Technical analysis can be as complex or as simple as you want it.

Chart Analysis

Technical analysis can be as complex or as simple as you want it. The example below represents a simplified version. Since we are interested in buying stocks, the focus will be on spotting bullish situations.




Overall Trend: The first step is to identify the overall trend. This can be accomplished with trend lines, moving averages or peak/trough analysis. As long as the price remains above its uptrend line, selected moving averages or previous lows, the trend will be considered bullish.

Support: Areas of congestion or previous lows below the current price mark support levels. A break below support would be considered bearish.

Resistance: Areas of congestion and previous highs above the current price mark the resistance levels. A break above resistance would be considered bullish.

Momentum: Momentum is usually measured with an oscillator such as MACD. If MACD is above its 9-day EMA (exponential moving average) or positive, then momentum will be considered bullish, or at least improving.

Buying/Selling Pressure: For stocks and indices with volume figures available, an indicator that uses volume is used to measure buying or selling pressure. When Chaikin Money Flow is above zero, buying pressure is dominant. Selling pressure is dominant when it is below zero.

Relative Strength: The price relative is a line formed by dividing the security by a benchmark. For stocks it is usually the price of the stock divided by the S&P 500. The plot of this line over a period of time will tell us if the stock is outperforming (rising) or under performing (falling) the major index.

The final step is to synthesize the above analysis to ascertain the following:

• 
  
  Strength of the current trend.
• 
  
  Maturity or stage of current trend.
• 
  
  Reward to risk ratio of a new position.
• 
  
  Potential entry levels for new long position.
  

http://www.stockcharts.com/school/doku.php?id=chart_school:overview:technical_analysis