TRADING RANGES, TREND LINES, AND BREAKOUTS
Right now, at least for the last 20 days or so, the stock market has been treading water in a trading range. You can see in the chart below that from the 20th of May to the 11th of June, the stock market has gone up and down and is still about where it was at the start. This is called a trading range as the market seems to be stuck between just below 10,000 to about 10,250.
The interesting thing about graphs is that they can show almost anything you want them to and you can interpret them in many ways. With the graph above, you can see the up and down daily movement of the Dow Jones for one month and clearly see that overall, it is going nowhere. However, if you show a graph of a 1 year period like the one below, things look much different and the sideways movement at the very end almost seems insignificant when compared to the whole graph.
There are some stock analysts that make their living by just analyzing graphs. They look for breakouts either in the up direction or down direction and use those as a signal to buy or sell. The problem is that you can choose any specific period and it may distort the graph into looking like something is happening when it is really not. Some analysts are skilled at looking for breakout patterns and signals but most are not.
If you look at the 1 year chart above, you can see the long upward trend through 2009 and the first 4 months of 2010. At that point, the chart goes down and really appears like it is still going down right now. But you can take any smaller part of that graph and when viewed by itself, it may appear that a breakout up or down is happening.
A breakout is when a stock (or the market as a whole) breaks through a trend line. You can see what looks like a break to the downside starting in May 2010 when the Dow stopped going up and suddenly went down. So far the graph has leveled off some but it has yet to break to the upside.
Anyone who is learning how to buy stocks may get confused when they hear analysts talking about trend lines and break outs. Most stock pickers make their analysis based on things like a companies prospects, product line, costs, management, and other fundamental things like that. But when you find an expert who just talks about graphs, keep in mind that they will often make a prediction based on a graph of a specific time period. If you were to shorten or lenghthen that time period, you might find that the graph becomes less convincing.
