Looking at the charts, then and now (October 28, 2011)

On the October 14 weekend, two weeks ago, we posted the following chart of the S&P 500 that showed the market had closed right at the upper boundary of a trading range that it had occupied for about 10 weeks, asking ourselves whether we would move up or down from there.

Note: Click on the chart for a slightly sharper view.

Chart of SPX 500 14 October close

The second chart below shows what subsequently has happened and updates the market action until the close on Friday, October 28, as depicted by the S&P 500 index. The chart shows that the breakthrough above resistance has actually occurred, helped mainly by both positive corporate earnings announcements and a lessening of tensions and uncertainty about the European debt crisis concerning the bailpout of Greece. But the problems of Greece, Italy, and Spain are still acting like a cloud hovering over the market, so possible reversals must still be watched for.

Chart of S&P 500 28 October

The Market currently overbought
The Relative Strength Index (RSI) shown at the top of the accompanying chart indicates that the market is in overbought territory. That usually means we can expect a small correction, so rather than chase the market at the current highs, many traders will await the expected dip before taking a position or two. If there are no negative announcements to roil the market, support should follow, making this a suitable entry point.

With many quality stocks currently at low prices, we are hoping that more big-time players will return to the market providing an increase in volume and a continuing uptrend in stock prices as we head into the year end. If that does happen, our Stock Market Basics Paper Trading Portfolio, shown below, has many of the right stocks that can illustrate typical stock price patterns that occur and that traders can often use to assist them in determining the entry or exit levels at which to take action on stocks of interest. For instance, the recent breakout, shown by the green arrow on the chart, would be considered by many to be an entry signal.

We should review the stock charts of each of the ten stocks in the Stock Market Basics paper trading portfolio to see what signals they provide, if any, and from there we can follow their progress for a while to see whether those apparent signals really were predictive.

A good example of increasing daily volume accompanying an accelerating trend direction can be seen on the charts. It was for a relatively short period and it accompanied a downward trend. The vertical bars along the bottom of the main chart (not the smaller MACD chart) represent the trading volume for each day and from late July until about August 10 thay show that an increase in volume occurred.

Here is the Stock Market Basics Portfolio/Watch List  as of market close on October 28, 2011:
(Our target is to gain an average of 25% by year end or soon after.)
The previous version as of October 14 can be seen here.

Stock Market Basics Portfolio - Watch List as of October 28

Forecast of future growth

After a good week for the S&P 500, as can be seen on the chart below, and the Alcoa announcement of a few days ago, Earnings Season has arrived.

While Alcoa’s quarterly earning were a little under the street’s reduced estimates,  they carried with them a positive outlook projecting future growth that could fuel stock market gains going forward. The chart tells the story to date where, for almost 3 months, the S&P has been confined to the trading range indicated between the two horizozntal green lines on the chart below, the uncertainties over the European debt situation have greatly contributed to the highs and lows of the period.

Conclusion
However, for small traders like us, it pays to be patient until we can see a confirmed breakout, either up or down, before re-entering the market. The charts will indicate when that occurs. Meanwhile, our Watch List/Trading List is still in force and valid for our future paper trading activities. At this time, the group of stock as a whole is currently showing an acceptable accumulated small percentage loss (1.1%) since it was initiated in September, but we know the list includes some very good stocks at depressed prices.

However, with the high volatility in the market of late, triggered by continued uncertainties on several fronts, our list may well show a much larger loss over the short term, although a series of good earnings announcements should help the cause, but generally it is hoped that the market will eventually breakout above the levels indicated on the above chart and provide good results into the end of the year.

Explanation: Why we Paper Trade stocks
The stocks in the list were assembled with a bullish bias, and are referred to here only as a learning device. Watching the stocks in real time as they trade over a period of time in this way, enables a newcomer to watch what happens as the stocks fluctuate in price but without actually having to participat using real money. Observing the stock market price fluctuations and seeing the trading price activity depicted in the form of a stock charts should help the observer to identify patterns that typically occur and tend to be repeated by other stocks at other times, the point being that some patterns tend to be indicative of future price movement.

Watching and interpreting the stock charts is sometimes referred to as ‘technical analysis’ although it is not a science or mathematical based activity, but for many who use the stock charts in this manner, it can be helpful in supporting decisions to enter or exit a stock position.

Our Stock Market Basics Paper-trading Portfolio
The Stock Market Basics Paper-trading Portfolio can be seen separately by using the computer mouse to click on the chart below. The chart is obtained from entries made on Yahoo.financ.com, and updated in real time on the Yahoo site with a 15 minute time lag. The data shown below summarizes the paper trading positions as of the close of trading on October 14, 2011. I find Yahoo Finance to be a very useful site for not only tracking a portfolio but also for obtaining up-to-date charts and news on individual stocks merely by entering their respective symbols in the “Get Quotes” box at to left of the display (beneath the HOME tab).

Paper-trading Portfolio October 14