Understanding Graphing

Why Graphing is Important:

One of the most important aspects of investing is understanding charts and graphs, for most of my investing career I didn’t pay much if any attention to graphing stock movements because I felt it was history and not relevant to future stock movements – was I wrong.  In December of 2018, when the market went down 20% I decided there had to be a better way to invest and I started looking at options, swing trading, and graphing.  It was a revelation to say the least.

You need to understand the following:

  1. Graphing gives you an impartial look at the stocks or ETF’s price activity for the period of time you select in the graphical chart.
  2. Many people who invest pay attention and rely almost exclusively on stock charts so the market activity in a stock is at the very least partially driven by stock charts.
  3. Straight-line Support and Resistance lines are very important in determining a stock’s or ETF’s direction and future price action.
  4. When there is a break in the stock’s or ETF’s price line it means that the supply and demand for the stock or ETF has changed and the graphical relationships that occurred prior to the break will probably not be the same as after the break.  This is the old classical economic theory of moving along the supply-demand line graph versus developing a new supply and demand line graph.  In market terms, the Greed and Fear index has changed dramatically, which can be caused by individual stock news, industry news, economic news, just general news, or the market’s Greed and Fear Psychology changes.
  5. There can also be times when there is no break in the stock price line and the same thing in 4 above can occur.

What Type of Graph ?:

There are a lot of different types of Charts and information, see Chart School for additional information, that can be graphed and are important to understand the overall market’s direction and have a bearing on ETF’s and individual stock’s price.  I have evolved a graph that will give you a better understanding of what is happening with a stock.

I developed a standard chart, see an explanation of the graph/chart below:

  1. The top of the chart has name, price-earnings ratio, latest price, dividend and other company data.
  2. The next level is DSI which is a Technical Indicator that indicates when a stock is overbought or oversold on a longer-term basis.
  3. The next level is the actual candlestick price chart, which has various Technical Overlays – Bollinger Bands, and simple 50, 100, and 200-day moving averages. There are also volume and straight-line resistance and support lines.
  4. The next level is the Williams % R indicator which is a very short term stock oversold or overbought Technical Indicator.
  5. The next level is the MACD Technical Indicator which is a momentum and trend following Indicator.
  6. The next level is ADX  a directional movement indicator.
  7. The next level is ATR which is a volatility indicator, which I have added a 300-period moving average to the indicator.  This gives you an indication that if the company is above or below its average volatility, this is especially important if you trade options.

Stock Charts.com explains all of the technical overlays and technical indicators, just click on the indicator and a detailed explanation of the indicator and what it is used for coming up, for example ADX.   The straight lines on the price chart, these become support lines when the prices go down and become resistance lines when they bump up against them.  It generally takes some kind of news to move through these lines either to a specific company or general market news.

One of the best indicators that a stock is going higher is when the MACD and the ADX converge, see the June, August, and October conversions, in all of these three conversions Alibaba went higher.  The stock will move higher when this doesn’t happen and the amount of movement doesn’t always indicate how fair and strong the move is going to be.  Wendy Kirkland’s Price Surge System at TradeWins.com explains this system in great detail.  See her weekly newsletter.  No matter how good the system, there is always risk, it never works every time, and in certain market conditions you can lose money.

The news that was affecting Alibaba in the chart above was tariffs from April through November.  Then in December they raised 10 billion dollars in an underwriting in Hong Kong and listed its common stock on the Hong Kong exchange.  As the tariff war ended and the Hong Kong price-earnings ratios much higher than the Shanghai Stock Exchange’s in China; Alibaba in my opinion was headed for a $275 to $325 price by the end of March before the Coronavirus hit the markets.

Another factor that affected Alibaba’s move is Amazon has a price-earnings ratio of 93.3 versus Alibaba’s 26.67.  Alibaba is growing faster than Amazon and they are in very similar businesses.  I don’t think that Alibaba’s price-earnings ratio will approach Amazon’s, but it should be at least half.  However, the coronavirus has changed things drastically.  Alibaba’s earnings are going to be affected adversely for 1 to 3 quarters, and for the current quarter sales and earnings are going to be lower than guidance, according to the company.  See chart for late January through the end of the chart for price action caused by the coronavirus in China.

Understanding the Difference Between Trading and Investing:

A trader would have gotten out of Alibaba in late January or early February when the coronavirus became a problem in China.  The probability is that Alibaba is dead money until the coronavirus is no longer a problem in China and the economy goes back to normal.  While investors are going to stay invested in Alibaba until something happens that affects the company for the longer-term rather than what is expected to be just a short-term event.  Alibaba stock is a good example of luck in the market and what a Black Swan event can cause a stock to go through.  The law of unintended consequences is always a factor in making an investment, in this case a bad consequence.

 

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