Three Basic Charts and What They Tell Us
Everybody loves to show us stock charts. You see them all the time in advertisements, on social media, and on television. Most of them sport fancy colors and weird symbols.
The problem, as new investors, is understanding what they mean. What are these data showing us? Should I buy? Should I sell?
What does it all mean?
Stock charts can be incredibly complicated, but they don’t have to be. The basis of every stock chart is the share price through time. That information tells us a lot about a stock. It’s like a poll of the market – it shows us whether investors like a stock or not.
However, a chart does not tell us how cheap or expensive a stock is.
Charts tell us one thing: how popular or unpopular the stock is. A stock chart simply maps the trades of a stock.
The Charts
Below, we’ll look at three simple versions of the same stock chart. These charts come from www.stockcharts.com. It’s an excellent charting website that offers valuable insights (there is a paywall for some of the tools).
To understand the charts, we need to know a few things – time scale and measurements. For example, these first two charts show the same period of Amazon.com trades.
The first chart is a simple line chart of the stock price every day:
Along the top, it shows the daily data for August 26, 2021. From left to right we see the stock ticker, date, price data (open, high, low, and close), volume of shares traded, and the change in the stock from the day before across the top. The bottom axis is the date. The axis on the right-hand side is the stock price. And the line is a single data point per day.
This chart only shows the price of the stock at the end of the day. It’s my favorite chart. It shows us how a stock performed over time without a lot of clutter. It doesn’t show us the value of the company – whether it is cheap or expensive.
We can change the density of the data, by using a weekly chart of the same two-year period:
A weekly chart shows us the closing price once a week, rather than once a day. As you can see, the long-term trend of the stock price stands out with less noise. It has the same overall pattern but lacks the short-term “saw teeth” of the daily chart.
As we discussed earlier, these charts do not tell us whether a stock is cheap or expensive. It only shows us popularity. And from March to September 2020, Amazon shares soared from $1,800 to $3,400 per share.
That’s a gain of 89% in just six months. However, the fever to own Amazon cooled from September 2020 to July 2021. We can tell that from the flattening of the line. Shares still rose in price, just at a much slower pace.
We can also use charts to look at more detail daily with an Open High Low Close (OHLC) chart:
This shows the opening price (left tick), the high price on each day (top), the low price on the day (bottom), and the closing price (right tick).
These types of charts are useful for much shorter time frames. In the chart above, the length of the vertical lines shows us the variation in prices of the stock. If we look at July 6, you can see the stock opened around $3,525 and traded up over $3,675 per share. That’s a 4% gain – the largest single day move on the chart.
But look at July 29 to July 30. The stock closed on July 29 at $3,600 per share. It opened the next day at $3,350 per share – a 7% loss overnight.
That made me curious
So I pulled up the headlines from that day. Here’s what Forbes said:
Shares of Amazon fell as much as 8% Friday after the e-commerce juggernaut showed a massive fine from European regulators for allegedly breaking regional privacy laws and posted second-quarter earnings results that failed to meet Wall Street expectations, putting the longtime market leader on track for its worst day in more than a year.
That’s one useful aspect of these daily charts. They show us events that we can research before we buy. In this case, the double whammy of unwelcome news made the stock incredibly unpopular. The company’s market value fell $130 billion overnight.
Stock charts start simple and become incredibly complex. We will go into some other valuable information, like trading volume, in later essays.
