Basic Stock Charting Patterns - Trends, Floor, Ceilings and Other Patterns of Technical Analysis

There are some who search through charts for price patterns, I've found that charting is useful for telling you where you are, but not that useful for telling you where you are going. Nevertheless, every investor should know the basics about charting, if for no other reason than to understand what other people are looking at and the predict their reactions. Here are some of the basic definitions that every stock investor should know:

Chart: A chart is a graph of price over a period of time. The most basic form of a chart is a line chart, which consists of a plot of the closing prices. A more useful chart is a OHLC chart, which plots the Open, High, Low, and close for each day (or week or month). This chart is more useful since it shows where a stock traded during the period, rather than just a point in time, which tells more of the story. Candlestick charts, which as colored or open boxes depending on whether the stock moved up or down during the day, are another refinement.

time frame: There are different time frames, which correspond to the length of time represented by each point on the chart. For example, a chart that plotted a point each 15 minutes, and spanned a day, would be a very short-term chart. A chart that plotted one point per day and extended a couple of months would be a short-term chart. An intermediate-term chart would have points that represented a few days or so and cover several months. Finally, a chart where each point was a week or a month, and covered a few years to a decade, would be a long-term chart. I'm typically concerned with the long-term trends, so I look at charts of several months to a few years or a decade in length.

Trend: A trend is the current movement of a stock. A stock will always be in an uptrend, downtrend, or drawing lines. We'll cover these in a later post.

pattern (Bull or Bear): Certain patterns are commonly seen that foreshadow specific price movements. One that would indicate the stock is ready to go up would be a "bull pattern"; one that indicated a decline in price a "bear pattern".

floor or support level: A price at which the stock traded at for a while before moving higher. When the stock hits that price, it tends to not move below it.

ceiling: The opposite of a floor. Here the stock price is below the ceiling, and it may be difficult for the stock to get above the ceiling.

moving average: An average in which the closing price for a specified number of days are added together and averaged. Each day a new day is added and the earliest day in the average dropped. Moving averages tend to smooth out the price of a stock and provide a clearer picture of what is happening. Also, a stock above its average may be pricey, one below it inexpensive. A 90-day moving average is a commonly used average.