Say you have an ear ache. You make an appointment with your family doctor and go to his office.
After you arrive, the nurse calls your name and ushers you toward an examining room. First, though, she asks you to get on the scales (ugh!). Once in the room, she takes your blood pressure, your temperature and your pulse.
When the doctor comes in, he may listen to your heart and your lungs. Then, he asks you to open your mouth and pressing a stick on your tongue, he inspects your throat.
Finally . . . finally. . . he looks into your aching ear and gives you a diagnosis.
Why does your doctor insist on all of the preliminary checks before addressing your aching ear? Because he wants to have a complete picture of your overall health before he identifies your ear problem.
Any irregularities in any of the pre-examination tests will contribute to making a more accurate diagnosis.
Which brings me to targeting potential candidates for our investing portfolios. Many times, in doing our technical analysis, we study only a daily chart of the stock that interests us.
Maybe it’s an entire year of price action, but to me, it’s not enough. It would be akin to your doctor skipping the preliminary checks that might add important information that substantiate an accurate diagnosis.
To this end, whenever I target a potential new position on a daily chart that I like, I immediately bring up a weekly or monthly chart that shows several years of price data.
In evaluating a long-term chart, I can determine whether or not this stock . . .
- Usually trades in orderly patterns (I don’t buy disorderly stocks)
- Has performed nicely over the years in a series of uptrends that show healthy growth
- Shows prior price support at the level I now want to purchase shares
If the weekly or monthly chart reveals that my target stock has long periods of jumbled price actions, regularly alternates between “booms and busts,” and shows no price support at the level I now want to purchase shares, I move onto greener pastures.
The daily chart below shows The Estee Lauder Companies, Inc. (EL). Say you evaluated the chart and were thinking of purchasing shares in the highlighted price area between $79 and $87. This zone shows that Estee Lauder is rising out of a prior downtrend and heading into a new uptrend – many times an optimal place to buy.
Chart Courtesy MetaStock
Your next step would be to switch to a weekly or monthly chart of EL to check the criteria we just discussed.
Chart Courtesy MetaStock
The monthly chart shows valuable information. You can see that EL has traded in an orderly uptrend since 2008. That means we can check off our first two priorities. It also displays prior price support at our current base support at $76. That means buyers have previously purchased shares at that price—a good signal.
Finally, as you can see in recent price action on the monthly chart, had you purchased shares in our highlighted area—or even a little later—you would have reaped sweet gains from the position, as Estee Lauder has been trading near $108.00.
Just as our doctor requires a full picture of our general health before he or she makes a diagnosis, when we are considering a stock or ETF to buy, we would do well to go beyond the visual boundaries of a daily chart so we can “diagnose” the our target stock’s “health.”
Weekly and monthly charts show us far more price history than a daily chart. That means we can make more insightful decisions that result in bigger profits.
Keep green on your screen!
Toni Turner is the President of TrendStar Group, LLC, is an accomplished technical analyst as well as a popular educator and sought-after speaker in the financial arena.
She is also the author of best-selling books: A Beginner’s Guide to Short-Term Trading, Short-Term Trading in the New Stock Market and Invest to Win: Earn and Keep Profits Bull and Bear Markets With the GainsMaster Approach, co-authored with Gordon Scott, CMT.