Chart tips for savvy investors

I keep reading disgruntled comments by investors who get frustrated and sell on dips – even while the stock is in an uptrend!
We have to stop being so mesmerized by the priceline and start reading other indicators before making buy/sell decisions. There are some very good chartists on this site but most of them are very advanced so¬†the neophyte may have¬†trouble understanding what they’re talking about.

Here are a few tips that anyone can understand and follow.

The two most reliable long/short term¬†indicators I’ve used in recent years are the 50 and 200 day moving averages and the accumulation/distribution line. We look for crosses and divergence in those. That’s important! Another thing – the trend is your friend. Stay with it!¬† Don’t panic with every price dip and sell. You don’t sell on dips, you accumulate. You SELL on strength. Get it? Good. Because most beginner investors don’t.

Here’s an example: Great Basin Gold, trading as GBG¬†on Canada’s TSX exchange and the AMEX. If you analyse the price over the past 14 months you’ll notice a rather modest¬†uptrend, with a couple of sharp bottoms¬†early in ’09. (Wooo scary).

Last summer the 50 day moving average climbed over its 200 day counterpart. A bullish cross! And since then, price has behaved beautifully, bouncing back nicely after touching support and the steadily rising 200 day moving average.

Over the shorter term, last week’s pop could have been predicted by comparing price with the price and accum/dist lines. When the latter moves up, it means the stock is under accumulation. In other words, the smart money is quietly getting into position for a subsequent rise.

This is bullish over the short term (which I define as three months) when price moves in the opposite direction.
Here’s what I¬†mean: In the chart below (courtesy of Chartwatchers), you’ll see price moving down from that $2.00 top in early Jan. – while¬†the accumulation/distribution line (very bottom) is creeping up.

It’s a very modest rise, but unmistakeable. It¬†means that price will begin to catch up, and in this case it did so rather dramatically –¬†begining last week and reaching resistance at $1.75 per share today (Monday, March 1). That was a classic bullish set up.

These indicators should be considered along with¬†the MACD and RSI,¬†both of them looking good in the case of GBG. In fact I¬†like to see¬†at least three bullish indicators before making a decision.¬†The whole point in using charts is to make better informed, more rational investing decisions, and if the tools are there and readily available, why not¬†learn how to use them? Don’t go on gut feeling or fears or greed. You should have clear and rational explanations for every decision you make.

Another thing:¬†With respect to this stock, I’d be bidding just above support at $1.40 and hoping for a short term technical correction. If the stock zooms up¬†and I¬†don’t get filled, well¬†it sucks to be me. I don’t chase stocks in this market. Deals are like buses, one every fifteen minutes.

Be careful out there.

1550 0

More Gold News