With all the fundamental analysis that you can apply to a stock there should also be room in your decision making process for the charts. Most people are used to the concept of identifying either Bullish or Bearish sentiment very easily by the application of a trendline. We have mentioned Trendlines several times in previous articles and it is prudent to examine them in more detail and understand a little more of what they can indicate.
Trendlines are drawn from peak to peak during a bearish (down) period and from trough to trough for Bullish (up) periods, either from the extreme points or from the most touches. The Trendline shows us some important aspects of the stock, most importantly it indicates direction, whether the stock is Bullish or Bearish, therefore if the stock touches an existing bullish trendline and 'bounces' from it then it may present a buying opportunity. However, if the stock breaks through the trendline then it could indicate that the trend may reverse, creating a shorting opportunity (subject to confirmation).
Trendlines can have different degrees of validity dependent upon the length of time they have been established, hence the degree of importance attached to long term trendlines that have been established for months or even years. Further validation occurs every time the share price touches, and bounces off of the trendline, indicating that the majority in the market recognise its existence. When such touches are accompanied by an increase in volume of trades then further confirmation can be taken. Changes in the steepness or angle of the trendline indicate changes in sentiment, these may be new short term trends that, if they fail, will indicate a reversal back to the more established trend and may even carry enough momentum to break through, as mentioned previously, to form a major reversal. Hence it is prudent to consider placing stop losses at, or about, trendlines.
From the above chart of Aristocrat (ALL), the reliability of the trend line is immediately identifiable. With an increase in bullishness toward the stock in August, the share price created a new steeper shorter uptrend. Once the underlying sentiment changed, the share price broke through the uptrend to from a new down trend. Even if the investor/trader was unaware of the overriding change in the fundamental analysis with the ending of the company share buy back, the break of the upward trend line alerted them to the change in sentiment.
A more recent chart below of Oilsearch Limited (OSH) shows the current long-term uptrend. Any break below or a bounce off the trend line could suggest a possible short-term trade. Look for the MACD (shown) and RSI (not shown) indicators to add support to the direction of the trade.
