Technical Analysis as a Stock Selection Tool

  • To paraphrase “A picture is worth a thousand words”, “check the chart before you chose “; in the context of building or maintaining a portfolio.

Don’t just dwell on wordy analyst submissions, and slavishly accept their slant! Eyeball a chart for yourself. It is surprising how much information may be evident. You don’t necessarily need to add indicator traces. It’s the picture of the price action which is all important.

Some features you might look for include:

Go back to the start.

  • When was it? To give some idea of the durability of the stock.
  • What was the price then, compared with now? What is the % change?
  •  How did the market greet the new arrival?

Look at the big picture of price action displayed in a weekly or perhaps monthly chart, over the intervening years.

  • Has there been consistent upwards re-rating of the stock price in keeping with inflation?
  • How has the stock fared in market down-turns?
  • Is there a history of unexpected and unpleasant surprises reflected in precipitous falls in price?
  • Has market interest been waning? Look at price range, volume and volatility.
  • How much of the time has there been just sideways price movement?

Most importantly closely examine the most recent price action.

  • For the presence and consistency of trending.
  • For change in momentum, such as transition from an uptrend, to a trading range.
  • For evidence of emerging trend reversal.
  • Is there evidence of institutional accumulation or distribution?
  • Check on the incidence and direction of price gapping between trading hours.

Favoured stocks for long term entry would be those with a long term record of price stability and intact upward trend.

A favoured situation for short term trading would be when there is emergence of an upwards breakout from a sideways trading range pattern.

Stocks to avoid would be those teetering on a downturn, or those in an established downtrend, no matter how highly analysts may view them.

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