Friday, July 29, 2011

Is it Time to Buy?

Most of this year the market has been in a trading range. The S&P 500 Index is now getting very close to its lower channel support line. If the debt ceiling legislation is not passed by monday the market will likely reach or punch through support. If a debt deal is agreed upon, we should get a nice bounce in the market.

The chart of the S&P 500 below is called a candlestick chart. It is called a candlestick chart because each day's trading is represented by a red or black bar that resembles a candlestick with a wick sometimes protruding from both the top and the bottom. The shape and location of these candlesticks can help us gain insight as to how the trading day, week or year has evolved. I like to use charts in my market commentary because they allow me to assess the market's condition in a simple and visual way.

So what is this chart telling us? Well, aside from telling us that the market is in a trading range, it also tells us we are near a potential buy point. If you want to make money in a trading range market environment, you need to buy at or near support and sell at or near resistance (the top channel line).

(Click on chart for easier viewing)

The red candlestick on the right-most represents yesterday's trading action. Notice that it has a long lower wick. This tells us that large players stepped in to buy, pushing the market up from its low of the day. This is a positive. It means that to some large buyers the price has reached a point of value.

If we buy near support we can define our risk and potential return by placing a stop just below support. If support holds our target is the top of the trading range.

This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar.

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