It was two weeks ago our that we posted a chart of the S&P 500 Stock Index under the article title “Still Waiting for the Breakout” and at that time my own opinions on the market and the near-term future were expressed with the title “A Stock Market Basics Personal Viewpoint”, so now, with a new trading week starting, it is appropriate to provide an update showing where we now stand – and that is a confirmation that the breakout we’ve been waiting for has occurred, here is the chart as of Friday’s market close:

Note: Click on the charts for a slightly enlarged and sharper view.

Chart of S&P 500, January 20 at the close

A mere glance at this stock index tells the story
The breakout occured with the move above 1300 and its continuation on the following days.

But many traders recognize the possibility of a fallback and will be watching events in the near-future carefully, However, more than one hundred corporations will soon be reporting earnings and prospects and if these announcements are good, as expected from previous indications, then we could be setting up for a move up to the 1360 high reached late last April, 2010, see chart below.

Chart of S&P 500 Showing 2010 Maket Top

A simple interpretation for stock market beginners
As can be seen in the first chart shown above, the most recent upward trend commenced towards the end of December, when the market closed above the 20-day moving average shown by the blue line.

After moving up from the December low at about 1160, it can be seen that there was a steady upward climb over the following weeks until early January 2012, when it began to consolidate, as it often does, moving mostly sideways. But after a few days of difficulty getting above 1300, an obvious resistance level, it finally broke above 1300. That 1300 now becomes a first level of support should the market experience a turn down.

Editor’s Note: I should have removed the Blue and Red lines that run accross the chart, they are not relevant at this stage although the blueline which shows the 50 day moving average is considered by many to be important and defines a level at which stocks should not be below in a bull market phase. The Red line is the 200 day moving average line, also a key reference level in some circumstances.

About the Stock Market for Beginners
Being a website targeted at readers who are new to trading and in the early throes of learning the stock market basics, I urge every newcomer to become acustomed to looking at stock charts in the simple way that I do and illustrate here on this Stock Market Basics website. There are postings about stock charts elsewhere on this website.

I also constantly urge anyone new to trading and now wishing to learn the stock markete basics before actually diving into the waters of stock speculation, to read, listen, and watch, whenever possible, to begin to build a fund of practical knowledge and trading tips. I have often listed such sources on other posts on this website and will just mention one source I myself like to check out from time to time, never knowing what I may learn. Today’s suggestion is to go to Finace.Yahoo.com’s Daily Ticker — you can find it by going to the Yahoo.Finance tab at far left at top of the Home Page, under the “Exclusives” drop-down box. This one specifically is worth a visit now: Gut Check Coming.

First, a few words of warning
I will list some of the basic and essential trading guidelines later in this piece, but first a general word of caution to introduce the stock market for dummies approach to the would-be trader in stocks.

I do not like the term “dummies” and I only use it here to make a simple point, not to put anyone down, so to speak. The truth is that without an understanding of the stock market basics, it is unlikely a trader will be successful and without a knowledge of basic guidelines to follow, trading would often be no better than leaving your money at the casino.

Start small and learn the “ropes” gradually
When someone has been around the block a few times and traded in the “Market” for years, their first word of advice to the eager newcomer is that this is not a game. This is not betting on the Broncos vs. the Patriots, this is business with your money and your retirement as part of the equation.

You can make money by trading stocks, but some losses are inevitable
I would suggest that it is best to start in a small way so that any losses that may occur will not be devastating but can be limited to an amount that can be tolerated and can be seen as a cost of a learning process that brings you out of the “stock market for dummies” category. There are ways to limit losses but it takes action. And everyone experiences losses, especially in the early days of learning how to trade.

Stock brokers and education
You need to approach stock trading with a maximum of education even if you use a broker. The stockbroker wants you to make money and to continue to make winning trades, because that’s good for business. But the brokers have their own agenda and you need to understand this if you use them. They get their commission in part for trading stocks and selling what the company finds attractive. They are not in business to see your portfolio increase since they do not get a percentage of the “profits” but rather they receive sales commissions. It is to their advantage to have you buy and sell stocks since they make their money on trades. That said, many brokers are good guys with your best interest at heart, but be aware.

Read all you can, books and items by William J. O’Neil, Peter Lynch, and others and columns such as John Waggoner’s in USA Today on Fridays for example, or go to the website SeekingAlpha. The more you learn the better you will be able to assess the merits of the information provided. Not everyone comes to the same conclusions about given stock or market situations, so with conflicting viewpoints offered, you, the trader, must make the judgement – aided by your existing fund of knowledge and accumulated experiences. The more you read the more you will understand and the better investor you will likely become, but it takes time and effort.

Online trading
But most trading is done online these days, without the aid of a broker, especially in the case of the small trader, who is classed in the category of “retail trader” as opposed to the bigger professional traders whose combined actions comprise, by far, the greatest portion of all trading in the stock market and thus responsible for most of the movement in their underlying stocks of interest.

The stock market is not for the faint at heart, but there always opportunities to make money. Buy and hold may not be the best option as the market has periods where it swings like a tempestuous pendulum.

So what are some of the basic guidelines?
While these suggestions are aimed at the so-called stock market for dummies category of newcomer to trading, actually they also often guide the decisions of some of the biggest, most successful, and most famous traders of all time. These guidelines, and many others, are discussed in greater detail in separate posts elsewhere on this website and can be found listed there by going to: Stock Market Basics Guide. The more experienced and expert trader can successfully break the rules and still make gains but for the beginner, such rules should be learned and adhered to.

Up or down markets
As a trader, you can make money in the stock market regardless of whether the market is moving up or down but the beginning trader is usually more comfortable trading when the market is primarily moving up over a period of time.
So from that comes a basic guideline:

• Don’t trade against the trend. Don’t buy stocks when the market is falling, if there are stocks that you believe are really worth more than their current price in a falling market then wait until they reach a “bottom” and turn around, once that is confirmed, they can be bought on the way back up. Do not “average down”.
• Cut losses early. Sometimes expectations for your stock don’t pan out, be alert, if the stock starts to decline, regardless of the reason (which may not be connected to the actual stock itself) be ready to sell. If the stock price falls by about 8% or so from its recent high, it’s time to exit the position. Take the money and move on.
• Let your profits run. When a stock does rise in price the objective is to capture as much of the potential gain as possible, without being too greedy and waiting too long of course and having to watch those gains evaporate. Remember, however much higher the price, you won’t book a profit until the winning stock is sold. It can be tricky sometimes. There is a trading routine called a “Stop Loss” that might be appropriate in this situation, explained elsewhere.

There are many more guidelines to become familiar with but I will just close with an often quoted rule attributed to the great Warren Buffet:

• Rule #1 Do not lose money
• Rule #2 Remember and follow Rule #1

A Stock Market Basics Personal Viewpoint

On the positive side, it is an election year, which historically provides a profitable stock market, although this is still a time highly negatively impacted by the Eurozone financial problems and also potential crisis situations in the middle east. However, short term we should be ready to take advantage of an up-trading market that appears to be forming but subject to breaking through current resistance levels on improved volume (higher volume).

For the week commencing January 09, 2012, as a cautious small trader, I am watching the S&P 500 index (SPX), since it represents the broader market than does either the DOW or Nasdaq.

Right now, as can be seen in the chart below, it has paused at about 1280, just below the resistance level shown by the yellow horizontal line on the chart, having moved up gradually from the previous low just above 1200 around December 19 when we last posted the SPX chart here.

Chart of S&P 500 Index, as of 09 January 2012, 3:00 pm

Still waiting
We were waiting then, and we wait now, but if the market can move higher and break through the present resistance level at about 1285 (let us say a close above 1300 would be a god sign, especially if accompanied by increased volume) we could reasonably expect some gains in the following weeks for stocks which have good earnings potential and some have already established breakouts through their own individual price levels.

Target
The target for the S&P Index would be to get back to the previous high of late April, 2011, around the 1370 level. There will probably be some ups and downs but that target seems realistic to me.

Learn about stock charts
That is why it is a good idea for beginning traders, who are learning the stock market basics, to learn as much as possible about stock charts and how to interpret, at least at a simple level, the price and volume activities the charts depict. What I mostly look for is a breakout from a trading range, or a breakout above a resistance level or below a support level. Most of those simple aspects are referred to elsewhere on this Stock Market Basics website, but there are plenty of other more detailed sources that can be found with a little effort.