Posted on 11/24/2004 8:56:26 AM PST by BenLurkin
As an investor, what would you trust more: the opinion of a single pundit, or the actual activity of thousands or even millions of investors? It's wise to choose the latter.
No pundit makes the right call all the time. On the other hand, a stock's price reflects the daily decision-making of every person interested in that stock. Ultimately, the herd judges whether a stock should go up or down, and for how long.
Charts reflect nothing more than the herd's action. If you can do simple math and figure out percentage changes, you can use a chart.
If you want to get aboard the biggest winners in the stock market, you have to use charts.
With a chart, you can learn to spot the pivot point, or the exact price in which a stock ends a period of range-bound trading and begins a long rally to new highs. Studies by IBD of the market's biggest winners over the past 50 years show that the pivot represents the best time to attain superior gains with less risk.
Yes, Microsoft, Cisco, Wal-Mart, Home Depot, Yahoo and many other outstanding stocks had such big runs during the 1980s to 1990s that some would argue all you had to do was simply buy and hold.
In theory, perhaps. But in reality, all of these stocks also made sharp declines during their journeys northward, from Home Depot's 57% plunge from August to October 1987 to Yahoo's 43% nose dive in the fall of 1998. If you bought at the top of these declines, would you have the nerves to hold on and sweat it out? Most of us don't. If you did so in 2000, you could have seen your stake shrink by as much as 95%.
Do charts frighten you? Or do you think they're just a worthless bunch of random lines? Consider charts as simply a visual story of supply and demand. Leading stocks go up because institutional investors are clamoring for shares. Their "greed" shows up as big price increases on bulging volume. On the down days, the price changes tend to be small, the turnover mild.
Use both daily and weekly charts. The weekly charts on the Stocks In The News pages (today on B6 and B8) and on investors.com help you spot long bases, the ones that last for six months to over a year.
Daily charts, however, have their own special value. A daily may let you see the handle more clearly and spot volume drying up during that last shakeout before takeoff. It also may make it easier to see a cup base that's only seven weeks long.
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