The Chartmasters are posting arcane messages all over investing forums. Messages seemingly written in some strange hieroglyph, a 21st Century cuneiform that can only be understood by other Chartmasters.

Their language is the language of the gods, they think. They interpret their lines to mean that there is heavy insider buying, that a stock is about to take off into orbit.

They foresee great things in these lines.

Those investors who don’t use or understand technical analysis shrug them off or ignore them, believing that they are foxy and the Chartmasters’ grapes will soon sour.

The fact is, charts can be a very useful tool, but they are only a tool.

The Basics of Technical Analysis

Anyone can look at a chart and tell whether a stock is in an uptrend or a downtrend over the given period of time.

The key tools that the Chartmasters use are the 200-day and 50-day moving averages. These are, simply, the average price of the stock over the previous 200-day and 50-day periods, respectively.

A quick look at a stock chart that includes daily prices along with 200-day and 50-day averages will show one jagged, bumpy line (the daily price) with two smoothed out curves that roughly follow the trends set by the jagged line.

A stock trading above its 50-day average is in a short-term uptrend. A stock trading above its 200-day moving average is in a long-term uptrend.

Value investors will look for companies trading below their 200-day averages. Growth investors will typically look for stocks trading in an uptrend, above the 200-day moving average.

Charting Your Buying Strategy

If you are thinking of buying a stock that is trading above its 50-day moving average, it is worth noting the stock’s volatility. If the stock price has dipped below the 50-day trend often, it may be best to wait until it does so again.

If, however, the stock has continually risen above its 50-day moving average without dipping below the average (and the 50-day moving average is, then, in an uptrend itself), the best time to buy may be right now.

Limitations of Technical Analysis

Due diligence is still due. Looking at charts cannot tell you anything about the company itself.

The balance sheet, earnings, and operations are still the fundamentals, and the fundamentals are what makes great companies.

But charts are a useful tool for quickly determining a stock’s demand over the past year, and determining an attractive price to move into a potential investment.

B. Patrick Regan is a freelance writer and a staff writer at
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