Timing is everything, especially when it comes to the investments about which you are advising your clients. What may very well help you is the ever-present chart.
Charles Dow is considered the father of technical analysis for he would pour over price charts that designed a stock's price movement, trading volume, and moving averages over a specific period of time. What was he really looking for? Actually, it comes down to one word: trends.
Dow fervently believed that if a stock rose rapidly, then the chances that it would sustain a particular trend were good, but if it was meeting any kind of resistance, which translates to reaching a price and then falling back and later rising but only to a certain level, then the odds were that the price would remain constant or the trend could be much lower.
My friends at Harrisdirect maintain that the study of support and resistance is still the "bread and butter of technical analysis." Even though many financial planners today use all sorts of statistical techniques, the best one may just be the Bollinger Bands. Introduced by John Bollinger in the 1980s, this chart helps to find a security's peak and bottom. Bollinger Bands are based on standard deviations that set parameters above and below a stock's moving average. The bends widen during unstable markets and constrict during quiet periods. Because sharp price changes tend to occur after the bends tighten, investors generally use Bollinger Bands to look for opportunities that could result from a pattern that show such constricting.
The people at Harris cite an example. Look at Exxon, they say. The Bollinger Bands around the stock's price narrowed in the fall of 2002 after it hit a low of $31 a share in October. Then, the price broke out in November and rose to $36 a share. This pattern was repeated again in February and in May of this year, just before the stock made major upward moves.
So, what does this show? With Exxon, a planner would have found confirmation in a number of different places. You look at the volume of shares traded and you would see that the investor interest climbed after the price bottomed in October and waned just before the price decline in January. Some analysts who study volume patterns look for such extremes in either direction.
Bollinger Bands provide valuable data on an individual stock and it may go a long way in determining a particular investment.
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