Reading Price Charts

XICAt first glance, it looks like the outline of a mountain range, but it’s a price history chart of an exchange-traded fund (ETF) which is an investment fund that trades in the stock market. There are many different styles of charting with a variety of analytical tools and measurements that you can apply to these charts to help predict the price direction. You can look at the price chart of any investment be it a stock, ETF, mutual fund, etc. There is no sure way of predicting price movement, but I find it useful to examine previous and current trends before buying any stocks. Today, I just want to go over what I see when I look at this chart because I’m interested in how the Canadian stock market is performing.

This ETF is the iShares S&P TSX Composite Capped Index Fund. This ETF trades on the Toronto Stock Exchange (TSX) under the ticker symbol XIC. It currently has shares of 235 of the largest TSX stocks. Looking at the price history of this particular ETF will give you a good idea of how the Canadian stock market is trending. There is a number of other similar market ETFs, but I like to look at this one. So what do I make of this?

Let’s look at the chart below. I drew some trendlines on the chart to mark the trend directions.

XIC with TLsA: Since early May last year, the market has been on a decline until the end of the year. There were big drops in August and September, followed by a bit of recovery in October. Despite these efforts to go up in the fall, the market maintained its downtrend from spring until the end of 2015.

B: This pessimism in the market was punctuated by a rapid sell-off in late December to mid-January. Has the selling come to an end? I would need some confirmation first before I buy any new stocks.

C: Since mid-January, the market has been recovering. It was only interrupted by a sharper drop in mid-February, but never quite hit the same price lows that we saw in January. This is often a positive sign confirming a turnaround and a good time to buy stocks, which I did myself. The market has been trending upwards since. It’s now the end of April. Will the market continue to go up from here?

Let’s look at this chart a different way. Below, you can see that I removed the trendlines and I drew a horizontal line to look for areas where the market might find difficulty moving through.

XIC with Line

I can see that in October last year, there was a lot of trading around the $22.00 area. I drew a line from there to where we are today. Interestingly, we are currently trading in the same price range.

For investors who bought shares in January and February, this may be a price range that they targeted their investments to go. They might decide to sell some of their shares here or hold on and wait for the trading to occur above $22.15 before they buy more. Will we go up from here?

There’s a popular saying, “Sell in May and go away.” This refers to a lessening of equities investing as we enter summer and this goes until the end of October. It is also worth considering that on June 23, there is a referendum among UK citizens that will determine whether or not the UK will remain an EU member. I think that whether or not the ‘Brexit’ will happen, the results will impact the overall market which could send it much higher or much lower.

My Own Trading

Since February, I had been systematically selling half the shares of the stocks in my portfolio that had doubled in value. I will keep a watchful eye on my stocks to see if they’re prone to a May sell-off or possible market shifts in late June. I’ll either stay in these stocks going forward or sell the rest of my shares depending on their performances.

I trade stocks in the short-term to make quicker profits. Sometimes this is a good plan, other times it means missing out on enjoying bigger profits because I got out too soon. I realize that shorter-term stock traders like me are considered by some as market parasites, that we’re only there to profit from smaller price movements and our money adds no real value to a good company’s stock. This sentiment does not hurt my feelings–this girl’s gotta eat!

True investing differs from just trading: it means being invested for the long haul–you buy shares of a company you respect, receive dividend payments, and you watch its value rise over the years. I do have a few of these too–for these stocks, regardless of what happens from May, I’m all in and for a long time. I may even buy more shares of these stocks in the future if I see good opportunities in the market and in these stocks’ performances.

There are also critics who think that analyzing price charts is just as effective as using tea leaves to make predictions. I don’t totally disagree with this opinion as I simply can’t predict anything with absolute certainty (neither can anyone else, as certain as they may feel).

Analyzing trends in the stock markets and in sectors is simply a way for me to anticipate direction. When the markets are going up, investors are optimistic; when the markets are heading down, investors are pessimistic. I don’t have a crystal ball that will tell me for sure whether things will go as I predict, or if some world event will occur to really rock the markets. I simply rely on my plans on when to buy and when to sell, I read the price charts to find these signals, and I consider what is going on in the economy and in the world that could affect a change in investor sentiment.