Buy Stocks With Big Potential
Daily, Weekly Charts Differ In The Details
By ALAN R. ELLIOTT, INVESTOR'S BUSINESS DAILYPosted 11/11/2009 05:57 PM ET
Before you buy a car, you walk around it a few times. You kick the tires. You have a good look under the hood.
Stocks deserve equal attention.
Investors making a thorough analysis of a stock's behavior put daily and weekly charts to good use.
Daily charts offer a blow-by-blow picture of a stock's action. Weekly charts consolidate the daily action into a bigger picture.
Daily, Weekly Viewpoints
Both views are necessary to identify stocks in bases and to determine when to buy and sell.
Details that can't be gleaned from the weekly chart easily show up in daily charts, and vice versa.
Start with weekly charts as a way to zero in on stocks building bases. Run weekly charts on top ranked or sector leaders in IBD's NYSE and Nasdaq Research Tables, for example. Or use Investors.com and blast through scads of weekly charts for top stocks in the IBD 100, Stocks In The News and other lists.
The goal: Find stocks shaping some of the eight basic bases detailed by IBD's founder and chairman, William J. O'Neil, in his book "How to Make Money in Stocks."
Signs Of Accumulation
A stock building the right side of a base should begin to show weeks of accumulation -- gains in above-average volume.
Weekly closes in the upper half of the period's trading range can also be counted as bullish signs.
And a base may mark its bottom with a weekly close near the highs of a long price bar, indicating a bullish reversal.
Also use a weekly chart to determine the age of a base. Start counting from the first weekly decline. Most bases need to be at least seven weeks long. It's five weeks for a flat base, six weeks for a cup without handle.
The daily charts can show bullish signs, too, such as gap-ups in price and bullish reversals.
Daily Action
Daily charts can reveal critical measures such as the length of a handle in a cup-with-handle base. Handles must be a minimum of five trading days long.
Daily charts also pinpoint proper buy points so you can buy at the moment a breakout occurs.
You want to see this happen on a strong punch through the buy point with a surge of daily volume.
At a more detailed level, daily charts are better to use when investors add to their initial positions. When a stock rises 2% above its buy point, investors can buy additional shares. Then, when it climbs 5%, they add a smaller number of shares.
As a stock's run progresses, use weekly charts to plot trend lines. Trace an upper line across the tops, a lower line across the low points in the weekly ranges in the advance. Sudden moves above or below these lines can spell trouble.
Weeklies help you gauge a stock's relation to its 10-week moving average, while the daily shows the 50-day line. Both are key levels of support.
Daily and weekly charts help reveal sell signals.
Daily charts can show exhaustion gaps. These gap-ups in price -- when they occur late in a stock's run -- are one signal of a climax top.
Use IBD Charts at Investors.com to study daily and weekly charts. These include basic moving averages.