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Stock Charts: A Primer

Helene Meisler explains her method for reading individual stock charts.

Quite often I get questions from readers asking me to describe the method by which I sort out positive and negative stock charts. With that in mind, I've decided to write about stock charts today.

First, a bit of background. I chart by hand. Yeah, I know I sound like a dinosaur to most of you. I mean, in this day and age, with access to the Internet and charts at my fingertips, why sit down and post about 150 charts by hand each day?

I thought the same way back in the early '80s when I started learning technical analysis. But my mentor, Justin Mamis, who had been posting charts by hand for 30 years, changed my mind. He told me that there was a certain feeling you got, not only from putting the pencil to the paper, but also from sharpening the pencil. I can remember rolling my eyes when he said this. All the same, I continued to put pencil to paper each day.

I tried giving up posting my charts by hand several years ago, when I began spending more time on the Internet. It took less than a month for me to go back to charting by hand. Why? There is a certain feeling you get from putting pencil to paper each day. But more importantly, it forces me to analyze the action in those 150 stocks each day, whether their action is interesting or not.

The charts I post are semi-logarithmic bar charts. A simple high-low-close and volume chart. Nothing fancy. However, I can watch a base or a top develop over time. This is one of the reasons I put so much emphasis on time in the marketplace. It takes time to build a base, the same way it takes time to build a top. When it comes to tops, while some stocks may fall apart due to bad news, most stocks actually roll over as investors' perceptions about that stock or its group change. And rarely do all investors change their views at the same time.

Bases aren't much different; it takes time for investors to feel comfortable owning a stock after a big fall. Take a look at

Baker Hughes

(BHI)

. This is a big base. It's been almost two years since the oil service stocks made their highs. There have also been plenty of false starts along the way, but the base has continued to develop. The low in December was followed by a successful test in early February (a successful test is one in which the stock holds at a higher low than before). The stock now rises in stairstep fashion, which I find particularly positive; this sort of action shakes out weak holders along the way, making corrections rather mild. This recent pullback hasn't dipped much in price, but has lasted about a month.

Apple

(AAPL) - Get Apple Inc. (AAPL) Report

is another base. In this recent correction Apple could've easily given up its recent gains, like many other technology stocks, but it didn't. It has dipped mildly, and on about one-third the volume it rallied on. However, you can see from the chart that Apple has a history of correcting for several months before pushing higher. It is therefore likely that Apple will continue to work sideways, digesting its April gains, before its next move higher.

Now let's look at a big winner, which has recently corrected over 30%:

America Online

(AOL)

. I said the other day that it didn't have a base, so I was not interested in buying it. This recent dip down to the 105 area broke two previous lows. For this stock to show up on my positive list, it needs to first rally through those highs around 143 (showing that it can eat through that resistance), then dip back down and hold at a higher low than its recent low (showing us buyers are coming in sooner, rather than later). That dip down would then look like a successful test, and turn this chart positive. However, you can see that I am talking about two more swings and quite some time before I can write this stock down on my positive side. For me, that's a lot of guesswork, which is why it is not my kind of chart right here.

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I would put

Amazon

(AMZN) - Get Amazon.com, Inc. Report

and

Yahoo!

(YHOO)

in the same category as AOL.

There is an Internet stock that does not look the same as the others:

Lycos

(LCOS)

. Lycos did not participate in the big run-up the others had in April; rather it peaked in late February and has been basing ever since. In addition, it put in a low back in April that was not violated in the May decline. For four months this stock has gone sideways, building a platform from which to go higher. That rally from 87 in early May to 120, followed by the slide back to 90, above that early May low shows the type of action that helps make a base. (This is the type of action described above that AOL would need to make it a positive chart.)

As for the market on the whole, it is still oversold, so we may expect the oversold rally to continue for a while longer. However, like AOL's description above, it appears that many stocks have not done enough base-building down at their lows to make us certain we've seen the lows. I believe when the market works off its oversold condition, it will come back down and test the lows.

Author's note:

I was reminded by several readers that there is no such thing as a

short trip from Singapore to the U.S. (total flight time is about 20 hours). It is the length of my stay that is short. I will write again on Wednesday, June 16.

New Highs and New Lows

Overbought/Oversold Oscillator

Cumulative Advance/Decline Line

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.