• Stock Commodity Charts

  • Basics of Stock Commodity Charts

    The charts can be effective tools to help you learn to trade with confidence if you know how to “read” and analyze them correctly. Once you finish this course, I think you will understand why I feel the charts contain almost all the information you need to trade. You will learn to get a “feel” for charts and learn to “hear” what they are telling you. Sometimes they will even “shout” at you! 

    In this lesson, we are going to look at several different formations. Don’t worry about the specific ways to trade them right now. We will cover this a little later. Right now, I just want you to see the charts—follow along with me for a little while.

  • Commodity Charts Trends

    The Trend Is Your Friend.” What this means is that the price may trend in one direction for a long time. You usually want to trade with the trend. Usually if the long-term trend is down, you want to be short; and if the long-term trend is up, you want to be long.

    There Are Three Types of Trends

    1. The Major Trend

    2. The Minor Trend

    3. The Near Term Trend (also called The Current Trend)

    The Major Trend. Charles Dow, author of the Dow Theory, said that the major trend lasts a year or longer. However he was referring to stocks when he said this. When looking at a commodities chart, you can shorten that to six months. However, some long-term trends can last for years.

    The Minor Trend. Most people look at the minor trend as being between three weeks and three months.

    The Current Trend. This is sometimes referred to as the near-term trend, and should be looked at as the trend in the last two or three weeks.

    When you look at charts, you will notice that in the major trend, you will see minor trends that could be opposite the major trend. Within the minor trend, you will see near-term trends that could be opposite the minor trend.

    Look at the very long-term downtrend in Cocoa on the following chart. It’s obvious that the major trend is down, but you will also notice that during the downtrend, the price rallied several times for a week or so. This is quite normal, as you will soon see.

    The price was way up at the start of the contract, and then changed trend as the price began to drop. This downtrend started in November, hit “bottom” in May, and then headed back up.

  • Obviously, if you had caught this trend back in November and stayed with it until June, you could have made a lot of money.

    Learning to draw trendlines is important in learning to trade correctly. To understand what a trend is, you need to define it first. A downtrend, as shown on this chart, is a series of lower highs and lower lows. An uptrend is just the opposite—a series of higher highs and higher lows.

    An uptrend can be intact until a previous support has been broken. Support is a place the price has a hard time breaking past or through. Same thing for resistance. You will learn a lot about this in Lesson Three. In the case of a downtrend, a breakout to the top of the trendline (when the price closes above the trendline for more than two consecutive days) is a good indicator that the trend might be broken. Of course the opposite holds true for an uptrend.

    When the price jumps above or below the trendline for one or more days but the closing price remains within the trendline, it’s called a “False Breakout,” and the trend is still considered to be intact.

    By drawing trendlines, you can see when the price breaks out, and when the trend may be broken. Look again at the previous chart for July 1999 Cocoa. I’ve drawn the trendlines for you. It’s obvious when this trend ended and the price reversed direction. When the price reversed and went up, you would have wanted to get out of all your short trades and go long, or buy a contract.

  • Drawing Trendlines

    I like to draw my trendlines across the tops AND the bottom prices. I feel this gives me a better visual feel for what the trend is doing. You don’t have to draw both lines if you don’t want to. Look back at the Cocoa chart and you can see that I drew both lines on this chart. I think it’s just easier to “see” the trend this way.

  • Confirming The Trend - Getting Three Hits

  • When you draw your trendlines, you must get three “hits” in order to confirm the trend. Let’s look at the following diagram to see what I mean.

    As you can see, the first two times the price hit the top of the trendline, it started the downtrend. However, it takes the price hitting the trendline the third time for the trend to be confirmed. Of course, the same holds true of an uptrend.

  • What Significance Does This Have?

    Remember in school—we learned that a body in motion tends to stay in motion?  The same holds true for trends. It takes a lot of energy, or momentum, to reverse a trend. 

    You might be wondering how to determine the strength of a trend. There are several ways I like to do this: 

    1. Number of hits

    2. How long the trend has been established

    3. Rate of ascent or descent 

    Number of hits.  The more times the price touches or hits the trendline, the more valid the trend. This is just plain old common sense again. Ten hits are more important that three hits. Right?  Of course they are. Look at how many times the trendline was hit on the Cocoa chart. 

    How long has the trend been established?   A trend that is six months old is obviously stronger than a trend that is six-weeks old; again, just common sense. Of course, a trendline on a monthly chart is stronger than a trendline on a weekly or daily chart. 

    Rate of ascent or descentOne of my students is a pilot, and we were talking about this once. He used the analogy of how fast a plane is descending. A plane on a 10% descent is much easier to pull out of the dive than one on a 30% descent. So keep this in mind when you are looking at trends. Is the trendline on a nice steady slow descent, or is it in a nose-dive?

  • Redrawing the Trendlines

    Sometimes “Old Man Trend” will try and fool you. Let’s use some common sense and see if we can stay on track. In the following diagram, in Example One, you will notice that the prices kept hitting the trendline over and over, and then it suddenly breaks out of the trend one day (point #4 in Example One). What do you do?  Is the trend broken?  Do you redraw the trendline?  

  • The following diagram may help in your decision-making process. 

    The way that I suggest is to wait until the fourth or fifth “hit.” In Example Two below, the next hit would confirm that the trendline should be raised, and connected between points 1, 4, and 5. 

    On the other hand, if the price did not rise (Example Three), then I would continue the trendline as it was in Example One, and would consider point #4 where it broke out of the trend as a false breakout.

  • How to Tell if the Trend is Actually Broken:

    There is no absolute way to be 100 percent sure except to just wait and see. One way that might help is to watch the closing price each day. If the closing price is beyond the trendline for two or more days, then it is a good chance the trend is broken. 

    You should usually not trade the first day the price breaks the trendline. It’s best to wait at least two days to confirm the trend is broken. Look at the following diagram to see what I mean.

  • In the above diagram, the top example shows you that the trend is still intact since the price did not close below the trendline for two consecutive days. 

    The bottom example shows the trend being broken, since the price did close below the trendline for two consecutive days. Hopefully, this will keep you out of some bad trendline breakouts. Sometimes the third day is the one that tells the true story.

    The Magnetic Trendline 

    Many times you will see the trendline act like a magnet. Look at the following diagram to see what I mean.       

    Many times, the trend will reverse from up to down, or down to up. When it does, you will often see the price hover around the trendline again. In other words, support becomes resistance, or resistance become support. The prices tend to hover around the trendline, like it’s a magnet.

  • One way to profit by this is to use the trendline as support or resistance for entering trades or for placing your stops. 

    You can see that this happened three times on the following chart of Aug. 2000 Hogs. Isn’t this interesting!  So keep your old trendlines on the charts, as they may act like a magnet and draw prices to them. We will cover this later in more detail.