December 5th, 2008

Use Various Time Horizons to Read Charts Better

I respect the research IBD does on Industry Groups and their leading stocks (have to because many on their list overlap my “Golden Cross” list) however, when it comes to chart reading, we just don’t see charts with the same eye.

Take for example a small, filler column in this morning’s IBD on page B5 about SXCI (SXC Health Solutions). According to the article,

SXC’s current consolidation may be viewed as a cup-without-handle base, now in its 10th week. In those 10 weeks there’s slightly more distribution than accumulation. But that could soon be awash by the end of this week, which is shaping up as a week of accumulation.

The other way to see the base is as a sloppy double bottom that began in June. That pattern has no clear trend of accumulation or distribution.

The cup-without-handle base, which is the second leg down of the double bottom, started with two nasty down weeks.

Theses high-volume weeks sliced key moving averages and showed the danger of a thinly traded stock such as SXC.

Here’s the chart IBD included with the article:

I’ve written here before how important it is to see charts within a number of time horizons in order to fully grasp the struggle between supply and demand to break the equilibrium and establish the trend of future momentum. Here’s the Telechart chart I saw:

First of all, what is a cup-without-handle in the first place (what is a cup-with-handle for that matter)? Secondly, I couldn’t see any of the features they wrote about in the article as being significant on my chart. Next, if there’s a “double bottom” it began in August last year, not from June this year. I could go on but you get the picture.

I often have similar problems with their analyses in the Investor’s Corner column usually on the back page. The patterns they give as examples (usually that reliable fall-back of “cup-and-handle”) are of such short-term time horizon that I could identify similar “patterns” on the same chart refuting the lesson they’re trying to teach.

My advice to all, step back, zoom out, get a longer perspective to make more profitable longer-term investments.

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