Reading a Stock Chart

By Alan Fleisig

Plato is the source for the idea that “Beauty is in the eye of the beholder.” There is always “beauty” – meaning, in this instance, a piece of useful information – to be found in a stock chart, if you know where to look.

A stock chart is basically a graphic representation of the stock’s historical price movements. The time period shown in the stock chart may be as short as a few minutes, or as long as the entire public trading history of that stock.

The most basic stock chart shows just the stock’s price. Quite often a stock chart will also show the “volume” (the number of shares traded). Looking at volume alongside price may help you understand how price changes and other news or developments may be affecting other investors’ opinion of the stock.

In the simplest analysis, a stock chart tells you something basic about how a stock has performed: Has the price risen or fallen steadily or has the price jumped around erratically? Has the price generally followed a steady pattern, but been interrupted by one or more major spikes or troughs?

In this latter scenario, did the volume also rise dramatically with the spikes or troughs? If so, a major positive or negative event may have taken place that created unusual movement in the stock’s price. It might be a good idea, then, to take a look at the stock charts of other companies in that same business, to see if they moved dramatically at the same time. That would be a sign that something was affecting the whole industry, and not just the one company.

The analysis of stock charts can range from the simple, as described above, to the highly technical. Applying mathematical, geometric or even logarithmic models to stock chart data is the basis for so-called “technical analysis.”

The simplest exercise in technical analysis is determining a stock’s “support” and “resistance.” Drawing (or imagining) a straight, horizontal line through the lowest point on the stock chart gives you the value of support, or the price below which the stock has not traded. Resistance, or the price above which the stock has not traded, is determined by drawing a horizontal line through the highest price. Where the current stock price lays with respect to the levels of support and resistance may help you decide whether the stock, at its current price, is a good investment.

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