Profits In The Stock Market With Charts
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Image Description: The graph shows the fed funds rate and the S&P 500. History is mixed on whether a Fed pause can be enough to end bear markets. But similarities of the current bear with the one from the 1970s suggest that equities might not require aggressive rate cuts to bottom.
When stocks plunge a natural impulse can be to hit the sell button, but the firm found the market's best days often follow the biggest drops, so panic selling can significantly lower returns for longer-term investors by causing them to miss the best days.
"Whereas valuations explain very little of returns over the next one to two years, they have explained 60-90% of subsequent returns over a 10-year time horizon," the firm noted. "We have yet to find any factor with such strong predictive power for the market over the short term."
At the beginning of best-selling book How to Make Money in Stocks, IBD Founder and Chairman William J. O'Neil shows 100 charts of the top-performing stocks over the last 100+ years. Whether it was General Motors in 1915, Coca-Cola in 1934 or Priceline.com in 2006, they all built the same types of patterns.
For best results, buy as close to the ideal buy point as possible. If you're not able to watch the market during the day, you can set conditional orders ahead of time. Those trades get automatically triggered if the stock hits your target purchase price. Ask your brokerage service how to set those up.
Once a stock climbs more than 5% above the ideal buy point, it's considered extended or beyond the proper buying range. Stocks often pull back a bit after a breakout. So if you buy extended, there's a higher chance you'll get shaken out of the stock because it triggers the 7%-8% sell rule.Volume on day of breakout: At least 40%-50% above averageOn the day a stock breaks past its ideal buy point, volume should be at least 40%-50% higher than normal for that stock. That shows strong institutional buying. On many breakouts, you'll see volume spike 100%, 200% or more above average. Light or below-average volume could mean the price move is just a head fake, and the stock is not quite ready for a big run.Learn to recognize different chart patterns with IBD home study programs.
So in most cases (see the 8-week hold-rule exception), you're better off locking in your gains to avoid watching your profits disappear as the stock corrects. And you can potentially compound those gains by shifting that money into other stocks that are just starting a price run.
P/E ratios are a cornerstone of fundamental stock valuation analysis, and are most commonly looked at for individual firms. The P/E ratio is (as the name suggest