How should one read charts? Is there any fixed formula? Is there only one way? This is one question that troubles many people who are in the business of chart reading.
Charts do not tell about the future. It only tells what has happened and by that one infers what's the likely reaction going to be. Sometimes, the movements are not definitive and luck plays a big role if one takes a bet on such stock price movement. Let me share one illustration
Here's ABB stock chart as of today
ABB stock recently made a big bullish candle move on large volume but that's about it. The stock was very quiet before that.
Is the stock price movement indicating a bullish future OR Should one dismiss this as one off move?
Let's take a closer look at the daily chart
ABB was holding on to 200 dma, as you can see on the left side of the chart, before it broke down below it. The stock then took support at horizontal support line of 1122 before it succumbed even below that level too. So, ABB in 2H CY2016 broke down not only below 200 dma but also below 1122 support line. It was a decisive breakdown BUT Now in Jan 2017, the stock has made a big candle move and reclaimed both the 200 dma as well as 1122. Technically, it means the breakdown is null and void now. It's also called false breakdown and it means the stock is price action wise healthy to reclaim 1400 level again. That's a move of 20%+
Am I reading too much? Will stock really take that bullish route? I have no idea. I see it as bullish but luck will play a big role if that actually happens. You never know this might be just one off move and stock might tumble. Who knows? As a price action follower - one can build scenario and hope it plays out as envisaged
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers