Stock Analysis Using Charts-Lesson#4

Image result for clock for stock analysis articleDon’t be confused by stock analysis tools and “experts.”  You can determine if a stock is a good buy based entirely on the time period you are looking at.  For example, let’s assume that the high and low for a certain stock are $40 and $20, respectively, for the last year and it is currently at $25.  It would be reasonable to assume that the price will likely stay in that range.  Thus it may be a good buy.  Of course it could drop lower than $20 or go above $40.  But if it has at least $1M dollar volume, then it is MOST likely that within the NEXT 12 months it will stay in that range and you could make 30-40%.

Nevertheless, this says NOTHING about what the stock might do in the next 5 years.  If you were looking at a 5-year chart, then suddenly it is NOT so great.   because maybe you can still expect about a 35% gain (based on the chart), but you must now assume it could take 5 years.  Charts beyond 1 year can be helpful (as I will discuss in a moment), but the longer back you are looking, the less likely your projections will be accurate.

Stock Analysis and Time

Let me illustrate with this imaginary stock:

theoretical chart for stock analysis to illustrate the relevance of time scale

Now let’s assume this a 1 year chart.  Since it is, then we can conclude that the chances of getting back up to $20 (a 33% increase) from today’s price in the next 12 months is reasonably likely.  But then imagine this is a 10 year chart.  We can only conclude that, although getting back up to $20 is very likely, chances are that it will take at least a few years.  That means that the return on your money will be more like 6% instead of 33%.

A Real Examplestock analysis chart of walmart

Let’s do a little stock analysis on Wal-Mart (WMT) to the right, for November 2009-November 2010.  From this chart you can see that the “current” price is about $54.  That is a very high price given this information.  Hopefully you can already see that buying “now” may not be a good idea.  Does that mean the price won’t go above $54?  No, of course not, but based on the past year, $54 is a high price and therefore it is statistically less likely to go much beyond that soon.  It is also not likely to go below $48.  So, if you saw this chart back anywhere in June-September, you would have seen an opportunity.  Now it is much more of a gamble.

Macy’s

Now let’s look at two charts from Macy’s (M):

macys stock analysis chart good buy

Stock Analysis with a 5-Year Chart

Based on my analysis, I think I would say that this is a decent price right now and would definitely consider buying.  I would further conclude that anything under $25 is a good buy and anything at or above $35 is time to sell.  But keep in mind that this is a five year chart of this stock.  So although it may still be a decent buy, I wouldn’t expect the price to shoot to $40 in the next 6 months.  However, I would expect to see the price hit at least $30 within the next year or two.

macys stock analysis chart bad buy this time

Stock Analysis with a 1-Year Chart

Now let’s look at the exact same stock for the last 1 year:

Suddenly our good buy becomes a lousy one!  What gives?  This price is at what is unquestionably a high point for the year, but didn’t we just say that this stock was at least a decent buy?  We did, but only based on the last five years, not the last one.  In other words, we would not expect to see $30 in the next year.  Although we might within the next couple.  So this stock is a decent buy if you are willing to hold it for a few years.  Again, it could skyrocket, but the chances of that happening aren’t super high either.

The Point is…

The point here is to pay attention to the time period you are looking at.  It should be your guide for the future.  I prefer to make my high and low decisions based mostly on a 1 year chart.  This is long enough for the stock to go up, but short enough to expect the chart to be an accurate predictor of the future.  A lot can happen over the course of years, so if you base a decision on a 5 year chart, things could drastically change during that time and put a hamper on your strategy.  There is nothing wrong with buying a stock because you think that it will grow over a long time.  Even if it may be high today, like say Amazon or Alibaba, you may still make money.  However, a chart won’t be a great indicator of whether this will happen.

More Than 1-Year Charts

Now a 1 year chart may be your best friend in making decisions about a stock, but it is also helpful to look at charts for 2, 3, 5 and sometimes even 10 years to get an overall picture of the stock.  This can help you see general trends that may bolster or hamper your decision to buy.  Imagine a stock that looks good for the year, but has an overall downward trend.  In other words, over the past 5 years, it has mainly just gone down.  Chances are this trend will continue even though it may look like a buy for the year.  In other words, it will probably go down even more.  However, if the 5 year chart shows an upward trend and it is low for the year, there is a greater chance that it will go back up.  Let’s look at an example.

Netflix

This is a 5 year chart for Netflix (NFLX):

netlix low for the year but trending up over 5 years

Proper stock analysis will tell you that Netflix is a great buy “right now” and it turns out you would have been correct.  You might see as much as $100 per share increase BASED ON A 1 YEAR CHART.  It has shown a trend of growth over time, so we wouldn’t expect a big bust coming.  Netflix did have a “stupid” moment in 2011 when they changed their pricing strategy, but they recovered and have been moving up ever since.  In fact, that decision was exactly the kind of thing that you should be looking to capitalize on.  The stock goes down for no real good reason and will certainly go back up.  In other words, that’s when you swoop in and buy.  Anyway, the fact that they are low for the year and have a general uptrend over the past few years makes me think it’s a good buy.

Rangold Resources

Now let’s look at Rangold Resources (GOLD).  It not only has a very cool ticker symbol, but is also at a low for the year.  Here’s the 5 year chart:

stock analysis of rangold resources cyclical over 5 years

First and most importantly is that it is low for the year.  Better yet, it has been somewhat cyclical over the past 5 years.  It hasn’t just headed south that whole time either. So yeah, it could go down further.  Nevertheless, the chart tells us that it is very likely that this stock will go up from where it is and probably pretty soon.

Wrap-Up

So remember, stock analysis does not have to be more complicated than looking at charts.  A 1-year chart of course is arguably the most important.  However, looking farther back can always help you make an even better decision.  It may urge you to buy or compel you to look elsewhere.

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