I am not one to baffle with overly technical analysis when it comes to charts. To me, the more obvious the pattern or point is, the more useful it is. The most obvious and basic points to identify on a chart are support and resistance; the highs and lows that a stock has touched over a given time period. The more times it has bounced off that level, the more significant it becomes.
The significance comes in two ways. Obviously, a breakout below a support level, for example, can result in a quick move down, while a bounce off of it can signal underlying strength and a potential move up. To traders the proximity to that obvious level in either scenario is the key. It gives a nearby, and therefore inexpensive, level at which to set a stop loss. This is best demonstrated by two examples, one a breakout and one a bounce.
First, let’s look at a breakout. The above is a 1 year chart for Sandridge Energy (SD), an oil & gas exploration and production (E&P) company. My first thought on seeing this chart was that Sandridge may represent some value as the stock was bouncing around at 52 week lows around the $5.15-$5.20 level. Unfortunately, though, there doesn’t seem to be any value to be had.
SD is a different proposition to the many companies that are making hay in the ongoing shale boom in the U.S. Their properties are concentrated in the Mississippian Lime field, so it is anything but a shale play. In fact, as shale oil becomes cheaper…