Greg Schnell, CMT, MFTA, specializes in intermarket and commodities analysis for StockCharts.com. He contributes market analysis commentary to several blogs that garner between 5,000 and 10,000 readers weekly.

Lita Epstein, MBA, has written more than 40 books, including Trading For Dummies, Bookkeeping For Dummies, and Reading Financial Reports For Dummies.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Beyond the Book 3

Where to Go from Here 3

Part 1: Getting Started with Stock Charts 5

Chapter 1: Brushing Up on Stock Charting Basics 7

Minimizing the Emotional Roller Coaster of Investing 7

Viewing Stocks from Varying Perspectives 8

Discovering All the Tools You Can Use with Your Charts 8

Getting Organized with Your Charts 9

Customizing Your Charts 10

Putting Everything Together 10

Chapter 2: Using Charts to Minimize Your Emotional Roller Coaster 11

Getting Ready for the Emotions of Owning a Stock 11

Understanding a few market basics 12

Leveling the playing field 14

Building a Chart to Track and Control Emotions 15

Checking Out Index Charts 17

Indexes around the world 18

Commodity indexes 19

The S&P 500 20

Defining Trends 20

Part 2: Viewing the Money Trail Through Different Lenses 23

Chapter 3: Focusing on Chart Settings 25

Choosing Chart Attributes 26

Starting with the time period, range, and spacing 26

Defining the price display 29

Displaying volume and toggles 33

Setting Overlays 34

Selecting Indicators 36

Common indicators 36

Volume and price as indicators 37

Chapter 4: Burning the Candle at Both Ends with Candlestick Charts 39

Deciphering the Parts of a Candlestick Chart 40

The candle body 41

Shadows on a hollow candle 42

Shadows on a filled candle 43

Windows 44

Introducing Color onto a Candlestick Chart 45

Crafting Your Chart 46

Reading and Using Your Chart to Make Decisions 48

Knowing when candles matter 48

Buying based on bullish candlestick patterns 49

Chapter 5: Spotting Differences with Bar Charts 51

Beginning with Bar Chart Basics 51

Price bar components 51

Different types of bar charts 52

Building a Bar Chart from the Ground Up 54

Putting a Bar Chart to Work 55

Gaps 55

Short bars versus long bars 56

Trading ranges, support, resistance, and breakout 56

Chapter 6: Seeing What’s Trending with Line Charts 59

What Is a Line Chart? 59

Making a Line Chart the Easy Way 61

Reading and Using Your Chart Line by Line 62

Adding support and resistance lines 63

Knowing when lines matter 64

Chapter 7: Getting the Lay of the Land with Area Charts 67

Comparing Area Charts to Line Charts 67

Making an Area Chart You Can Show Off 69

Strengthening or dimming the area display 69

Trying different colors 70

Adding color lines to emphasize change 70

Looking at legends and labels 71

Adding a Personal Touch with Styles 71

Knowing When Area Charts Matter 72

Part 3: Using Chart Tools for Decision Making 75

Chapter 8: Charting Different Time Periods 77

Converting Candlestick Charts to Different Periods 78

60-minute to daily candle display 78

Daily to weekly candle display 79

Daily to monthly candle display 79

Weekly to monthly candle display 80

Converting Bar Charts to Different Periods 81

60-minute to daily bar charts 81

Daily to weekly bar charts 81

Weekly to monthly bar charts 82

Converting Line and Area Charts to Different Periods 83

Taking It One Day at a Time with Daily Charts 84

Looking at the daily price movement in context 84

Using a range of one year (or more) with a daily chart 86

Examining market capitalization with daily charts 88

Embracing Short-Term Thinking with 60-Minute Charts 91

Highlighting intraday price action 92

Using 60-minute charts for index watching 92

Seeing the Big Picture with Weekly Charts 94

Weekly bar charts 94

Weekly line charts 95

The big benefits of weekly analysis 95

Knowing When a Monthly Chart Can Come in Handy 96

Recognizing major long-term lows and highs 96

Analyzing investor behavior 97

Picking the Right Chart for the Right Range 98

Shifting Your Focus to Closing Prices 99

Chapter 9: Reading a Price Chart 103

Running with Bulls and Sleeping with Bears: Uptrends and Downtrends 104

Recognizing an uptrend 104

Spotting a downtrend 105

Bucking the Trend: When a Stock Isn’t Trending 107

Looking at consolidation basics 107

Recognizing different periods of consolidation on a chart 108

Reading investor behavior during consolidation 109

Leveling Out: It’s All about the Base 110

Types of bases 110

The start of an uptrend from a base 114

Reaching the Top: Muffins, Spires, or Something Else? 115

The rounded top 116

The spire 117

The parabolic run 118

The double top 119

The range trading top 120

Scaling for Profit: It’s Only Money 121

Arithmetic scaling 121

Logarithmic scaling 123

Scaling guidelines 123

Chapter 10: Harnessing the Power of Overlays 125

Keeping Track of Moving Averages 126

Plotting a moving average 126

Looking at moving averages for different periods 129

Examining the uses and benefits of moving averages 133

Getting into the Groove with Channel Investing 135

Keltner channels 135

Bollinger Bands 139

Moving average envelopes 140

Finding Your Sweet Spot between Horizontal Support and Resistance 142

Chapter 11: Using Indicators to Facilitate Chart Analysis 145

Beginning with Indicator Basics 145

Divergence 146

Bounded and unbounded indicators 147

Rolling with Momentum Indicators 147

Moving average convergence divergence indicator (MACD) 148

Momentum displays that look like the MACD 150

Relative strength index (RSI) 153

Stochastics 158

Using Volume with Price 161

Chaikin money flow (CMF) 162

Money flow index (MFI) 163

On-balance volume (OBV) 165

Accumulation distribution (ACCUM/DIST) 166

Determining How Many Indicators to Use on One Chart 167

Chapter 12: Making Sense of Relative Strength Indicators 169

Relative Strength Investing Basics: Seeking Better-Performing Stocks 170

Sectors and industries 170

What makes a strong stock 171

Four things to know in relative strength investing 172

Measuring a Stock’s Relative Strength to the S&P 500, a Sector, and an Industry 172

Creating a ratio chart 173

Interpreting a ratio chart 175

Making broader comparisons 176

Ranking Stocks with SCTR 176

Introducing technical ranking 176

Plotting and interpreting the SCTR indicator 178

Looking at the components of the SCTR indicator 179

Breaking down peer groups for technical ranking 181

Understanding market movement in the rankings 181

Protecting your capital with SCTR 183

Using SCTR for base breakouts 185

Checking Out Performance Charts 186

Using Relative Rotation Graphs (RRG) 188

Part 4: Getting Organized and Managing Stock Trends 191

Chapter 13: Organizing Charts into Industry or Sector Groups 193

Recognizing the Importance of Sectors and Industry Groups 194

Creating and Populating ChartLists 195

Creating a list with a name and a number 195

Populating a list with one or more charts 197

Building lists with industry groups or sectors 198

Using the Number in Sorted Order button 198

Removing numbers from stocks inside a list 200

Organizing Your ChartLists 201

Interesting charts 202

Temporary scan lists 202

SCTR list 203

Watch list 203

Current open positions 203

Closed trades 203

Sector or industry lists 203

ETF list 204

Market overview 204

Index lists 204

Chapter 14: Keeping Track of What’s Going On 205

Making a Watch List 206

Surveying predefined scans 206

Saving scans to ChartLists 208

Creating and Using Your Three Main ChartLists 209

Deciding which stocks to move 210

Moving stocks into your three lists 211

Setting Alerts 212

Chapter 15: Conducting Breadth Analysis 215

Investigating Bullish Percent Indexes 216

Understanding how a buy or sell signal for a single stock is recorded 217

Interpreting the results for groups of stocks 217

Studying the Percentage of Stocks above the 200 DMA 220

Looking at the basic chart 220

Comparing breadth information 220

Reviewing the Breadth of Different Exchanges 222

The NASDAQ composite breadth 222

The New York Stock Exchange composite breadth 225

The Toronto Stock Exchange breadth 226

Chapter 16: A Quick Check of the Week’s Action 227

Counting the Days 227

Up days 228

Down days 228

Inside and outside days 229

Responding to Weird Price Action 230

Volume and price bar extremes 230

Outside reversal dates on weekly charts 231

Tracking Key Events 232

Options expiration days 233

Fed meeting dates 234

Spotting a Break of Support on Indexes 235

Part 5: Personalizing Your Stock Charts with Styles 237

Chapter 17: Customizing Candlestick Charts 239

Picking Your Personal Candlestick Indicators 240

Daily candlestick charts 240

Weekly candlestick charts 242

Saving Your Personal Style 244

Creating your default ChartStyle setting 244

Saving multiple ChartStyles 245

Trading Using a Candlestick Chart with Your Settings 246

Trading a daily candlestick chart with annotations 246

Trading a weekly candlestick chart 250

Sharing Your Customized Charts 251

Chapter 18: Fine-Tuning Your Bar Charts 253

Adjusting Bar Chart Settings to Your Liking 254

Colors 254

Overlays 255

Indicators 255

Special settings for weekly bar charts 256

Trading Using a Daily Bar Chart with Your Settings 257

Trading Using a Weekly Bar Chart with Your Settings 259

Chapter 19: Adjusting Your Line and Area Charts 263

Creating a Custom Weekly Line Chart 264

Developing Your Own Monthly Line Chart 266

Selecting your indicators 267

Saving your monthly line chart 268

Trading a monthly line chart 269

Setting Up a Specialized Monthly Area Chart 270

Part 6: Putting Your Stock Charting Expertise to Work 273

Chapter 20: Using Your Charts to Inform Your Buy, Hold, and Sell Decisions 275

Separating the Strong from the Weak 275

Sector summary 276

Industry summary 279

Knowing When to Hold ’Em and When to Fold ’Em 279

Checking the speed of movement 280

Looking at typical support levels 280

Gauging gains 280

Following technical clues to help manage your trades 281

Thinking about trading styles 283

Considering big picture trends 284

Selling Stocks Before They Head South 284

Chandelier exits 284

Parabolic stop and reverse 285

Chapter 21: Putting It All Together 287

Gauging the Market’s Direction 288

Market tops 288

Leading sectors 290

Market breadth 294

Position of the indexes compared to the 40-week moving average 295

Narrowing Your Focus to Certain Sectors 296

Choosing your fishing holes: Sectors with promise 297

Investing in different sectors for ballast 298

Using SCTR reports 298

Considering income stream investing 299

Using Targeted Scans 299

Working with Price Displays, Overlays, and Indicators 302

Price displays 302

Overlays and indicators 303

SCTR and the relative strength rankings 303

Taking Away Lessons from Your Wins and Losses 304

Journaling about the market and your trading 304

Tracking and analyzing your winners and losers 305

Continuing to buy winners 306

Refraining from holding losers 307

Part 7: The Part of Tens 309

Chapter 22: Ten Common Investing Mistakes and How to Avoid Them 311

Trying to Fight the Market Instead of Following It 311

Buying a Loser 312

Chasing a 25–35 Percent Off Sale in Great Companies 313

Falling for a 75 Percent Off Sale 314

Forgetting That Commodity Stocks Are Very Volatile 314

Buying a Story Instead of a Stock 315

Investing in a Sick Sector 316

Selling a Winner Too Soon 316

Continuously Avoiding What’s Worked 317

Not Buying Stocks in Falling Markets 318

Chapter 23: Ten Tips for Cashing In on Tomorrow’s Amazingly Great Stock 319

Being Prepared for Big Moves in a Short Time 319

Understanding That You Don’t Have to Be First to Buy 320

Waiting on the Big-Name IPOs 321

Seeing Huge Gaps on Earnings 321

Watching for Crisis in a Stock 322

Using Volatility to Warn the End Is Near 322

Measuring Volatility with the Average True Range 323

Realizing That the SCTR Won’t Help Find Exits 323

Working with Bollinger Bands 324

Using the U.S Dollar as a Guide 324

Index 327

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