IN THIS CHAPTER

Exploring the basics of line charts

Setting up a line chart

Drawing trend lines for support and resistance

Are you the type of investor who is just interested in following the closing price for the day? Many investors consider that the most important piece of information. When they look at their monthly stock reports, the closing price gives them what they want to know: Is the price higher than it was the month before? The line chart gives these investors a picture of what is most important to them — the trend of the closing price over a particular period of time.

In this chapter, we describe the structure of a line chart, show you how to create one, and explain how to use one as you make investing decisions.

What Is a Line Chart?

A line chart shows the direction of the closing price. This quickly gives the stock-chart reader a view of the price trend. A trend is established by continually lining up prices side by side and connecting the dots. Because the closing price for a stock is the most important price, the line chart connects closing prices rather than the highs from each day or the lows from each day. Figure 6-1 shows a basic line chart of closing prices for Bank of America (BAC) from January to June of 2017.

As you can see in Figure 6-1, a line chart is a clean, simple chart without a lot of busy information. Line charts are used frequently on financial news television channels like CNBC because it is easier for the viewers to read the data quickly on the screen.

In Figure 6-1, the chart has price labels showing the highest highs and the lowest lows of the closing price. The chart legend in the top left-hand corner tells you the current closing price of $22.82. Quickly scanning the chart, you can see this closing price is in the lower half of the chart. You can also see that the closing price has been oscillating between $22.25 and $24.00 for the last few months (from mid-March to the end of June).

Line charts’ biggest benefit for stock-chart users is that they enable you to view a lot more history, which gives you more insight into the long-term trend for the stock. You don’t lose any information from a shorter-term chart, but you can get a feel for the stock price in a larger context rather than thinking short term.

In Figure 6-2, you can see a multiyear view of BAC from January 2015 to June 2017. The chart shows you that BAC made a huge move in 2016 and has been consolidating those gains for the last six months. At the end of 2016, BAC’s closing price jumped from $14.94 to $23.01 and then consolidated in a range between $21.86 and $25.42. Investors like the longer-term understanding that line charts provide.

Making a Line Chart the Easy Way

In Figure 6-3, you can see how to use the Chart Attributes area on StockCharts.com to set up a line chart. You can select the type, color, and time frame for the line chart. (For the basics of chart settings, check out Chapter 3.)

You can select from six different solid and dashed line types. The solid line chart type is in the drop-down menu. You can also choose Solid Line (thick) to help you see the line better.

One of the toggle boxes below the chart type is for smoothed lines. This is purely cosmetic and makes the chart look more professional. If there are a series of data points in a row that make the chart move quickly like the BAC chart in late 2016, this option will smooth the lines so they don’t look pixelated.

We don’t find using different colors to show price movements up and down that helpful on a line chart, because you can easily see whether the line is pointed up or down. You may prefer different colors, though. Select from the drop-down menus for up color and down color in the Chart Attributes area.

Another setting that works nicely with line charts is above the chart type but still in the Chart Attributes area. Within the Range drop-down menu is Select Start/End, as shown. Use the slider to the right where the arrow is pointed in Figure 6-4 to conveniently change the time period you want to see on the chart.

Reading and Using Your Chart Line by Line

As you can see from the figures in this chapter, line charts communicate price action very quickly and simply without any significant detail. One of the key benefits of line charts is that they don’t show intraday extremes that may or may not be outside a trading range.

As a long-term investor, you want your price chart rising from bottom left to top right. That means the stock is rising in price over time. As a short-term investor staying in a stock for weeks or months, you still want the same price action, but you’re looking to exit before the long-term investor does.

In the following sections, we show you how to add support and resistance lines as you read line charts, and we explain how line charts can be handy when you make investing decisions.

Adding support and resistance lines

In Chapter 5, we discuss the concepts of support and resistance. Support shows when there are more buyers than sellers and the price, which has been going up, turns downward. Resistance is the opposite; when there are more sellers than buyers, the price moves down, and at the point of resistance, the price moves up.

These concepts can be important when you’re using line charts as well. Support/resistance areas help you define points of interest on the chart. You can draw support and resistance areas easily on a line chart because they are so clean and simple. Figure 6-5 shows you how to use horizontal support and resistance lines to find the key trends. In addition to horizontal lines, you can also see places where trend lines that slope can be placed.

Figure 6-5 shows closing prices for Tesla (TSLA) from January 2014 to June 2017. From Tesla’s April 2016 high to its December 2016 low, the sloped resistance line shows you how the price steadily moved lower at each top. We call these sloped lines trend line resistance. When Tesla finally found support around $185–$188, it bounced through the trend line resistance and surged all the way up to the next level of horizontal resistance around $285.

Knowing when lines matter

New investors first starting to use charts seek to answer these two critical questions that don’t seem intuitive:

• Why would you buy when price is just above other high price points on the chart?
• Why would you sell when price is near the bottom of the chart?

Those are both good questions, and line charts can help answer them.

When price is breaking above former resistance levels or price is falling and there are previous support levels nearby, chartists will use these critical points on the chart to assess whether or not the stock should be bought or sold to maximize profits.

An example of buying at higher prices would be buying Tesla in April 2017 as it went to $290, which was a new high above $285 (see Figure 6-6). Everyone who owns the stock is profitable, and the price is moving to higher highs. Why would an investor sell a winner he already owns that continues to keep on winning?

Because most investors won’t sell, there is less supply. Those who want to get in to the winner stock create more demand, which makes the stock continue to move higher. The stocks that make new highs usually start by making one new high and then continue to make new highs for a while. This critical point just above resistance on a chart is a good profitable area to watch.

In the event of price moving below support, you don’t know where it is going to stop next. In Figure 6-6, Tesla fell below support in February 2016. Everything on the right side of the chart after February 2016 was unknown at that time. Tesla continued to fall another $40 down to a level that was support in 2014. By selling near $185 (the support level), you can save a lot more pain by taking some losses. In this case it worked out, and Tesla rebounded. That is not always the case. If you choose to sell when a stock breaks its support level, you can still buy the stock again at some point in the future, perhaps when it is trending higher instead of lower.

We discuss strategies for using line charts in Chapter 19. Using line charts with horizontal support and resistance lines as well as trend lines can really improve trading results because they help you find the critical price moves.