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Ep 84: Evaluating & Breaking Apart a Stock Chart in Detail

May 12th, 2016

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Hey, this is Sasha Evdakov, and thanks for joining me here for another episode of let’s talk stocks, episode number 84. And in this episode, what I’d like to do is show you how to break apart a chart in detail.

Before we get into this lesson, I do have a few announcements here. I’m going to be launching this little book, it’s going to be a mini guide book, it’s going to be absolutely free for those of you that are on the newsletter list. You’ll be getting that probably within a couple of weeks.

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It’s just a small PDF book that I’ve been working on, and I think it’ll just be helpful, it’ll be absolutely free, no cost to you, just some knowledge that I think you should read through to make yourself better, and that book is called “20 rules for investing success” and of course you can apply these rules for trading as well.

Looking at the market

If we take a look at the overall market. These last couple of days have been a little bit more up and down, specially today, we’re kind of hitting these highs in this range, and we did have a pop on the 10th here, on Tuesday, and then a major sell off on Wednesday, and now the market tried to pop it, but moving basically sideways today, tried to drop down, but then they brought it back up, so we’ve kind of been isolating in this little range or region moving sideways.

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If you look at the weekly, you can see we’re kind of hitting these high peaks that we hit in November, and that’s what we’re getting into. And your goal is not to time the market perfectly; your goal is just to find where the money is moving into, the direction that the money is moving toward. Is it better, more favorable for you to now go to the short side, or is there more room to the upside?

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That’s what your goal is, and it depends on your time frame or outlook on the stock, the time that you plan to hold it.

For me, I typically hold things less than a quarter, so less than a couple of months, and that is simply because of the earnings, and the other accounts that I also trade, I typically will trade ETFs, like the like the SPX, which is the SPY, or the RUT. And the RUT, you have the IWM, which works with the RUT, so the IWM is the smaller version of the RUT.

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The reason I trade these again, is because you don’t have to worry about earning, you don’t have to worry about fundamental analysis, you simply are trading an ETF, there’s no earnings reports, there’s no fundamental analysis that you have to do, you just look at the charts.

But if you’re trading a stock that does have fundamentals, so you need to then evaluate that stock at a deeper level, and by a deeper level, you should also check those fundamentals.

Typically, stocks with great fundamentals have great charts and stocks that have great charts, have great fundamentals as well.

But as you start looking at these charts, you know and understand that typically, the technicals, the charts do trump the fundamentals, they are more important when things break down, because as things start breaking down, the fundamentals do not apply.

For example, when you have this move on a retracement basis, and then a sell off, people during this sell off, this is an A-B-C-D pattern, and when people are selling during the C-D leg, they’re basically getting out in a panic.

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And at that point fundamentals don’t apply, they’re just trying to get out to safe their positions, to safe their profits and so forth.

That’s what happens, and that’s why typically I always put more emphasis on the charts, because the charts are a little more real time, because the markets will trade irrationally, and a little bit crazy when something wild happens. So that’s one thing to always keep an eye on, when you’re trading.

Let’s take a look at this week’s lesson, and let’s break apart a chart in detail, and I’ll do one that many people are familiar with, so that way you can get an idea of what’s going on, what’s happening, and I posted this chart on the critical charts as well.

See the bigger picture

When you first look at a chart, you want to look at the lay of the land, when you’re scanning a stock chart, or when I’m scanning a stock chart, I may scan it on the daily, two day or three day, the only reason I scan maybe on a two day or a three day, is mainly because I’m able to see more data, it allows me to go wider on that chart, so it allows me to just see the bigger picture. You can see things from up high, it’s kind of seeing things from outer space.

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That’s what I’m trying to do, I’m trying to find where are my swing points, I’m trying to find what the lay of the land is, I’m trying to get an idea of how that stock’s been moving over the course of some time.

Typically you really want to go out wide, when you’re looking at the stock chart, you’ll go out to a weekly, you’ll check the monthly, you should be checking the daily, so again, let me re-emphasize that.

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You need to check the daily, you should check the weekly and the monthly. Here I’m pushing the number one on my keyword, the number five for the weekly and the number nine for the monthly.

You can see here, apple, we have the monthly. So this gives me a larger view of the stock. So now I look at this and I wonder, what is it that I see in the picture? How is the bigger picture in this stock?

And when I start looking at this right away, I start seeing some points. So right here in this spot you see an A-B-C-D pattern that’s being created.

If you don’t know what and A-B-C-D pattern is, pick up one of the books that I have, like “start trading stocks”, or one of the courses and I’ll go over it in detail, like “stock trading foundation course”.

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Here’s the A-B, B-C, C-D pattern that was created, and typically this A-B is the same distance that you’ll get from A-B as you’ll get from C-D, so that’s typically the same distance, so if we measure this distance out, this distance right here, if you look at the left side, right around 89 points. This one right here, when we look at it, we go ahead and we see that this one is right around 80 points, so about 9 points off, I’m not going to hold it against it, because we did have a stock split. But about 9 points off, and then we see this retracement coming in.

That’s the first thing I notice, I notice that the stock is a little overextended, it was overextended at the highs here in 2015.

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That’s the first things I notice, because our A-B-C-D pattern was complete. So if you want to break things apart a little bit further, of course you could do Fibonacci sequences and see how those came in if they are hitting them correctly, meaning precisely.

Stocks don’t go straight up

You can see here, we have a 50% retracement, if I get the lows of 2009 and get them to 2012, you can see that pull back was right around 50%, and what do we know about the pull backs? Well, a 50% pullback is a healthy retracement and pull back.

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They can still go down to 61.8 or even back to their original break out point and nothing would be wrong with the stock and then they can bounce and continue higher. That’s just digestion because stocks don’t go straight up.

The question comes down to, are you going to be the one that’s going to be able to hold it through those pullbacks?

You have to look at your trading timeframe. When I look at this one, we’ve had a 50% pull back, which the pull back was right around that $55 range in apple.

So again, I can take a Fibonacci sequence from mid-2013 to about that 2015 level and see this gives me a rough estimate of where that stock can pull back into on a longer term picture.

We could get to the 50%, which we already did, which was actually the highs of 2012, right there, you can see that line hitting it, so if we look at that line, you can see that line hit right there, right in the mid of 2012, and we broke that level.

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You can see we had some support right there and we broke that level recently, and now we could get back into the 61.8 range, which would be right around that $90 or $88. Right around that level, where we hit some highs in 2012. So that 61.8% would put us right around there. And we can get there without a problem on this stock.

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This is a long term view of the stock, this is a longer terms view, and it gives me the bigger picture and it shows me that this stock can get to about $85-$86 on the longer timeframe view.

Take a closer view

Now what I do is, I look at a little bit of a closer view, so I’ll go into a weekly. So I back track out of it, and now you can see our A-B-C-D pattern, because we’re still able to see from 2009, all the way to 2015, there’s our A-B-C-D pattern.

But it’s a little bit less clean. So now we start taking things in, and right now we know that we’re in the upper leg of that C-D, so here’s our C-D leg.

Evaluate retracements

You can be a little more precise now if you’re trying to do some Fibonacci sequence retracements, you can go ahead and see here as we get into it, here is that 61.8% level. You can see it’s right around that $85,90.

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If you want to do precise calculation, there is a precise calculation in the books, in the courses that you can go ahead and take a look at, but for now, for the time sake, I don’t have the time to do that calculation, but basically you take the lows and the highs and you take the 61.8% of that and it brings you own right here to this $85-$86 level.

Now, you start taking a look at this, and you say, is that stock retracing in a healthy way? Or is it retracing in a powerful way to where it could create a more major sell off? So these are the things you need to look at.

Look at the volume

I start looking at the volume, so how is the volume acting? How is the volume acting right now on the weekly? Are we getting buyers, or are we getting sellers?

And you can see when you look at the current bars, the high bars, you have pick up and selling pressure. It really starts right around the 2015 range, because everything to the left of this, there is more bullish spikes, before 2015.

We did have some pull backs in 2013, but now everything to the right or forward past 2015, we’ve had more red spikes, or bearish spikes.

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That’s kind of the concern for me, when I start looking at this, and again, you want to check the monthly. How is the monthly looking?

Do you see more green spikes? Or do you see more red spikes? Really, you only see two green spikes within the last 10 months, and are we decreasing in volume on these red spikes, or are we increasing?

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And in fact, you can see as far as the average is concern, the average of volume, where actually breaking a couple of those averages, so that means we’re starting to pick up and accelerate that selling pressure slowly.

You can see that here, on the C-D leg, we were decreasing in volume, which means the stock was running out of steam, people who wanted it, got it.

You can see that it’s decreasing right here, and now we’re starting to kind of slowly increase as we got into 2015 and 2016, you can see it’s slowly changing direction, these are big shifts, so the momentum takes time for it to change direction, so it’s going to be a slow process here, may take a little while for that volume to pick up, we’ll see.

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And it may not get that high, because you may see buying coming in around this level, we’ll see how the next few quarters go.

But now you start looking into, as you get into this weekly, and you start looking at it, we had some selling pressure, so now you start looking at, you could be the person that says, let me wait, let me be patient, I want to buy this as a value play, or I want to short it.

So first off, where do you create this position, or what you do currently, and when would you buy it as a value play?

So here’s what I would do. When I look at this now, we’re still on the weekly chart. I look at the previous swing point highs. So I’m looking still at the weekly, even if I’m buying a stock for a day or a couple of days, I’m still going to check the weekly and the monthly.

I’m looking at this swing point, which is right around January-February 2012, the highs of that are right around $93, and then I’ll draw that across and I’ll look at the swing points that it’s hitting right there, and you can see where it’s hitting some of those swing points that are around August 2015, and then you’re heading February of 2016, so here you have some of these highs and lows.

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Evaluate the price

Then I take a look at the price, I watch the price, what is the high price and what did it reject with? The high price here is $92.03, so call it $92 to make it even, what was the previous week there? The high price, $90 is the price I’m looking at.

What about the swing point here on august 28th, 2015? So, I look at this, and then I evaluate what is the price here on this bar, so on this bar, the low of the price, because this was a bounce, was exactly $92.

And I evaluate then the next ones as well, in February, so in February here we had $92.39, we also have $93.69, and $92.59, so we bounced around that level, and we did it on what volume? so I’m looking at what volume did we bounce at? What volume was coming in for those weeks and for those days?

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That’s what I want to evaluate next. So I’m looking at it now on the daily. I take it out now to the daily, and now I start evaluating this more intermediate turn.

If I look at it on the weekly, if I’m looking to short the stock, this is my line in the sand, and I posted this one in the critical charts a couple of weeks ago as well.

This would be my line in the sand, so that is what I’m watching in order to get into that trade. And if I’m looking to go short, I’m waiting for that line to break, and I’m checking the volume of that.

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Now I look at it on the daily. Because I’m ready to make my decision. So I see if this confirms to what I was reading on the monthly, the weekly and now the daily.

This stock tried to break on day 24th, on Monday, these flash crash lows, with 162.1 million, call it 162 million. It couldn’t do it, not enough time yet.

Then we get back down and now we bounce with 55 million, this is on January 28th, 2016. So we bounce on 55 million. Then we tried to get there, we bounce on 50 million, we bounce on 40 million, so we try to do a few bounces here on basically 36 and so forth million.

After that bounce right here, we did this bounce and we try to climb a little higher because we couldn’t break it lower, so they’ll take it higher, so what happens to the volume? Well, if you take a look at the volume, you notice that the volume starts to dry up, notice how this volume creates a drying up action, it decreases.

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Whereas here, from about December 2015 to February 2016, look at the amount of volume that was traded there to the downside. It’s picking up speed, it’s picking up energy.

Now we push it higher on lower volume, and then once we get into that next level where it breaks, it can’t hold that support, it takes it out, look at the volume that it takes it out on, 46.9 million, whereas the previous day you only had 25 million, the day before that you had 33 million.

But it took it out, here on basically 46 million and then 60 million, that’s your sign, that’s your clue. And then you had earnings coming out, took the stocks even lower, and now that stock was hanging right around that 92 level. It’s trying to hold that support from before, at this level that we tried to do on the flash crash and the same thing that we tried to do here over in February. And it tried to hold it.

Think of this like a hammer, keeps hammering on the roof, and the more that it keeps hammering on this roof, the more likely it’s going to break that roof, and eventually, you had to be a little bit patient, it took two weeks, 12 days, 13 days, took about 2 weeks to break it, but today we got that break, and we did it on 76.1 million, so the previous day it was 28 million, then you had 33 million, 32 million, but today we did 76 million, nearly double the average, almost triple what we did the previous day, and now it broke.

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This takes that stock to a whole new territory, so now when we break this level, what does this mean? Well, that would be your short entry point. Really, you could’ve gone short even before that, right around this level, but you had earnings right here, so you probably would’ve gotten out, and then you could’ve gotten back in it again, but you’d have to be careful because you could’ve had a bounce here again, just like we had this bounce that ran that stock up.

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Your safer position actually was right now that break. You want to watch tomorrow to see if you get a follow through, because if you don’t, what can happen is it can retest this level and try to get back up to here, and if it rejects it, that confirms your move.

We did have massive volume, so because of that, I’m pretty sure it will continue moving lower with time, but that doesn’t mean you can’t come back up to retest this $92 price level.

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Project the stock

But here, we broke on massive volume, so now I look at where do we project this stock to go? If you short, now you just ride it down and take some profits and continue to peel back your position, remember stocks don’t go straight down, and remember, it’s still apple, so because it’s apple, there’s going to be people that are going to love this stock and try to get it as a value play.

You might not be able to ride this one down to let’s say the $55 level. But let’s see, where can you ride it down to the short side, and where would it be a good place to buy as a value play?

Because now, if you don’t trade short, you might be wondering, where is it a good favorable price? And where is it that I could step in?

Wynn

Well, I like to use the example similar to what Wynn did right here, when you see this move, you can see Wynn has been moving down sideways, and if you look at the pattern, which basically did the same thing that apple was doing.

You have the A-B, stocks moving the same way, B-C and C-D and now we’re selling off huge, that sell off lasted in Wynn from 2014, right around 1.8 almost 2 years, and then we had a sideways consolidation.

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So what’s healthier and better to see in apple is this sideways move, if you can see this sideways move for about six months, three months, that’s healthier, so here you can see, we’re moving sideways, then down, sideways, down, sideways, down, and then a larger sideways.

You can see how much larger the last sideways move was, because it had to turn that boat around, and now it’s starting to climb higher, so now you might get a higher prices, retracements, higher prices retracements, so that’s typically how the movements work.

If you apply this to apple, what’s going on here? Well, now we’re doing this pull back motion, so you got here a pull back, retracement, down, retracement, down, retracement, down, so this is the pattern that we’re moving in.

You can apply the A-B-C-D pattern, so if we take, let’s say, here are descending trend line, you can see it’s making lower highs, so you can continue doing this and continuing this motion.

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Now, I do a measurement, if I do an A-B-C-D pattern, I can see, was this retracement somewhat favorable? When we went to the highs here, here’s my daily, so this is my most recent pattern, so I take the fib sequence from the swing highs to these lows, and look and how this retracement came right in to that 61.8 level right here, and rejected those prices right around the $111, it’s not going to hit it perfectly, but it reject them at 111.

This would be my A-B on the shorter term of course because we’re on the daily, C to and then where it’s going to be the D. So that’s the question mark.

I’m looking at it now, and I back track a little bit. I zoom out, this is the weekly, so I take this measurement from the highs here to the lows here, we did 32 on the downside, so that’s our initial measurement.

Then I do the next measurement, I take it 32 points down, which puts me right around the $80 price level, and if you look at it, a fairly interesting place in that stock.

In this $80, notice how we’re hitting these highs around the 2014 level. And the lows here of the 2012 level. So we’re heading some predominant levels here at the $80 level. So that would be a nice value play position and you want to watch how it comes into this, because if it comes into this, really slowly, more than likely, it’ll bounce off of that level.

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If on the other hand, it comes in and it starts coming in fast, more than likely, it’ll break through that level, and now you got to reevaluate things and maybe it’ll get down to around the $60 level, because then you’ll have to reevaluate what’s happening.

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But you want to watch if it’s a slow move, and it starts to roll a little bit, you might see it bounce, and that could be your value opportunity when it starts to come back into this deep shape. Otherwise if it’s going down and it goes quickly, it’ll break through.

That’s some of the things you want to pay attention to when you’re looking at a chart, and that’s how you really break a chart down, at least in a quick simple form, more detailed than normal probably, and more detailed than what you normally go through.

But you want to watch all those things, whether you’re day trading, whether you’re swing trading, you want to break those things down on the chart. And start looking at them in that way, you want to start looking at the charts on that weekly, you want to look at them on the monthly, and then you want to look at them in the daily, and create this story behind the prices, the price movements of these stocks, because once you do that, you’ll be able to really understand what’s going on underneath the surface.

If you simply just look at the chart, and you get confused, then you need to take a step back and reevaluate that chart, and reevaluate what’s going on underneath that surface.

I hope this was helpful, we broke things down a little bit in one of my future courses, we’ll probably go into breaking things down even more in detail than this, we’ll go into some extreme details and breaking it down, but that of course is sometime next year in the future, as we wrap up some more training material.

Keep your eyes out and pealed for the 20 investing rules book, which should be coming out here in the next couple of weeks, absolutely free, you’ll be able to download it, just make sure that you sign up to the newsletter, it’s just one of those things that I think you should go through and apply and use for your investing and trading strategies, and it’s just my way to thank you for watching the videos, for being so kind and for just embracing the material.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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