Anyone interested in technical analysis knows that I get excited every time the stock market opens. Every session provides a new data point that is completely different from the previous day, week, month, and year. Ranges fluctuate, price levels change, and news influences buying and selling behavior. It’s a new puzzle to understand, and analyzing stock charts is the only way to understand what’s going on.
Why Analyzing Stock Charts Matters
That analysis relies on finding patterns that repeat over and over again. i love that challenge. If you learn to spot patterns, you can look to the past and make inferences about future behavior. This is no guess. Human behavior never changes and shows up in chart patterns. Learn how to read charts and spot patterns. The odds are in your favor. It takes stronger probabilities than guessing the day of the week.
I often preach the benefits of reading charts and responding to patterns as they emerge. This is a recent example of why this is so important to your success as an options trader.
The Nasdaq has recently broken below the weekly 200 moving average (ma). See the big red arrow at the top. It was his first time in over two years to cross this support line, so it was a very dangerous signal. Anything less than 200 million a day is bad news in the short term. Below the week is a big concern for the long-term trend. In fact, the longer you stay below that line, the more resistant you will be to crossing it back during a rally attempt. When this happens, you can expect more downsides.
The SPX 500 made a similar trip last week under 200 ma. This is another warning sign, and if there is a downward follow-through this week, we can also expect a long-term downtrend for this index.
Charts provide unbiased information – use them
Finally, charts tell us where we have been while providing information about the future.Use charts to your advantage if you trust them to give you accurate information. These are especially important during this uncertain time.
If you’re new to technical analysis, check out the book I co-authored with editor Monica Jansen. “Know Your Options” is the only book on the market that teaches both how to trade options and analyze charts and technical indicators. I might be biased, but it’s a great guide for novice option traders. (We are currently working on the second edition, which will be available within the next month.)