Excellent Technical Analysis Example

There are a lot of technical indicators used by stock investors.  Some screens are so filled with colors, lines and data it tough to make heads or tails from what you are looking at.

It is helpful to remember there are only two data inputs.  Price and Volume.  Price determines the trade direction and volume establishes conviction.  Focusing on these two variables and adding a simple relative strength indicator can yield a great deal of information about the potential near-term price action.

Take the example below.  This is a high-growth tech stock that has delivered outstanding returns to investors over the last couple of years.  This stock when public in 2015.

Marketsmith, Dightman Capital

In weekly chart above we can see three different basing patters (identified by the green dots and curved line).  Two of these bases were consolidation types and the middle base was a cup w/handle type (the handle slopped upward which is a potential concern).  The most telling part of the current late stage base (also a warning) can be seen when comparing it to the prior consolidation base of about a year ago.

Notice how the current base is downward sloping (current price is near the bottom of the base range).  The base this stock produced over a year ago featured the price staying more in the middle and then upper range.   You should be able to see an upward sloping trend just looking at it.  The current consolidation is producing the opposite, a downward slope.

Below the price bars you see the blue relative strength (RS) line. The RS line measures the price performance of a stock with the price performance of the S&P 500.   If the line is trending higher it is outperforming the market.  For growth investors often a new high on the RS line is a bullish buy signal.  It is extra bullish if this line hits a new high ahead of the price.

In this example, the RS maintained an upward slope during the first two bases.  Now it is starting to exhibit a downward slope.  The red lines over the RS were drawn to show the change in slope.  Notice how in the first base the slope of the RS line initially weakened.  This is normal and to be expect as a stock rests.  It is possible the stock above will still move higher and the RS line will turn higher.  But, if the price of this stock moves below the bottom of the current base consolidation, that would increase the probability this stock is going to see weaker price performance in the near-term.

Posted in Dightman Capital, Technical Analysis, U.S. Stock Market and tagged .

Brian Dightman