- What stage is this stock in?
- Is this stock in and uptrend
or a downtrend?
- Is the stock at the
beginning, middle, or end of the
trend?
- How strong is the trend?
- Where are the trend lines?
- What wave is this stock in?
- What do the moving averages
tell me?
- Was there a breakout
recently?
- Is the chart "smooth" or
"sloppy"?
- Are there any chart
patterns?
- Are there wide range candles
in the direction of the trend?
- Are there any gaps in the
direction of the trend?
- Are professionals selling
strength or buying weakness?
- Where are the support and
resistance areas?
- Is this stock at a Fibonacci
level?
- What does volume tell me?
I know it seems like a lot of
information to try and keep track of
but all of the above questions are
essential to chart reading mastery!
Now, copy and print out that list of
questions and keep it handy next to
your computer. Make several copies
so that you can check off and make
notes as you analyze your next
chart.
Go ahead, I'll wait...
Got it printed out? Great! Now
you won't forget anything important
when it's time to analyze a chart
for your next trade. In the heat of
battle, when emotions are running
high, it is very easy to forget to
look for some of the most basic
things on a chart. I've done it.
That is, until I made this list!
Ok, now let's go through the list
one by one to make sure that you
know how to answer the questions
correctly. Don't worry, with
practice, you will not even need to
think about these things. It will
become automatic.
You will be able to read charts
with lightning fast speed. In just a
couple of seconds you will be able
to glance at a chart and know all
the answers to the questions above.
Stages, Trends, and Waves
Let's look at an example chart...
Nice chart! This stock broke out
through a consolidation in July and
now it is in a nice strong trend.
The green arrow is the day on which
we see this stock. So, what
questions can we answer just from
glancing at this chart?
This stock is in stage two.
You remember the stages right?
Stage one is a consolidation, stage
two is an uptrend, stage three is
another consolidation, and stage
four is a downtrend. This stock was
in a stage one in July but at the
end of July, it broke out into a
stage two. It is currently still in
a stage two.
This stock is in an uptrend.
This is the easy part. If a stock
is heading toward the upper right
corner of a chart then it is in an
uptrend! For some reason, this tends
to elude some traders!
This stock is near the middle or
end of the trend.
How do we know that? The breakout
signals the start of the trend.
There has already been one
significant pullback. Had we bought
stock on the first pullback, then we
would have concluded that we are at
the beginning of the trend. But
since this is the second pullback,
then we know that this trend may not
last much longer.
This stock is in a strong trend.
The ADX indicator (not shown) is
near 30 which we consider to be a
fairly strong trend. The higher the
ADX, the stronger the trend. This
stock is at the lower trend line.
You can see by the thick green line
that this stock has hit the lower
trend line. You can draw the trend
lines in manually, but after you
have been trading for awhile, you
will not need to draw them. You will
be able to see them automatically.
This stock is in the fourth
wave.
In Elliott Wave theory, a stock
goes through 5 waves in an uptrend.
In the chart above, the first wave
after the breakout is wave 1. The
first pullback is wave two, the next
wave up to $17.33 is wave three, and
the pullback that we are in now is
wave four. There is one more wave to
go!
Conclusion
Now we have identified that the
possible future direction of this
stock is up. Nothing is ever certain
in the stock market! However, by
looking at this chart we can be
certain that the probabilities are
on our side for a continued move to
the upside.
After you finish reading this
tutorial, run your scans and go
through some charts. Try to identify
the various factors mentioned above.
Just understanding the nature of
stocks and the different stages,
trends and waves that all stocks go
through will greatly improve you
trading. Soon, all of this direction
analysis will become second nature.
You won't even have to think about
it.
Were not done yet!
Continue learning how to read
charts...
