A Picture May Not Tell the Full Story, But It’s a Start

When the market gets frisky, sometimes a line chart isn’t enough. Hidden within the chart settings of Yahoo Finance, Morningstar and Google’s stock pages are powerful tools to easily visualize market action. Chances are, you’ve already seen candlestick and OHLC charts pop up many times. They have been around for so long in fact, it’s assumed all readers know how to interpret them. That’s doubtful, since I was a broker for several years and no one even discussed how they work. Once I did learn about these charts, I never looked back.
 
Candlestick and OHLC charts present four times as much information as a basic line chart in the same sized graph and that information can be very handy. For example, I was recently wondering what sort of economic data might drive retail stocks. I became curious to see how Amazon reacted to consumer confidence data. The Conference Board’s Consumer Confidence Index was released during market hours on July 28, so I wanted to see whether AMZN became more volatile when it was released.
 
The daily line chart (this page, below) doesn’t tell us much, since it just draws lines between the daily closing prices.
 

OHLC Charts 


Example of a Daily Line Chart

I could, of course, look at an hourly line chart for the day, but that would require the additional steps of resetting the chart to a new date range and hourly prices. I’m a lazy chart reader, so allow me to reintroduce you to the OHLC chart. Yahoo Finance calls it a bar chart. Both names are common. OHLC stands for “open, high, low [and] close.” Each line in the top part of the chart represents one day. The horizontal line to the left of each vertical line is where the stock opened. The line represents the range the stock traded over the day (the high and the low) and the horizontal line on the right of each bar is where the stock closed on the day. The red and green bars on the bottom of all these charts are the trading volumes. Volume helps you evaluate the significance of a price change.
 
The lower the volume, the less excited buyers are about the higher price. Compare that to stocks that rise on increasing volume. That implies there’s still untapped buying interest. But always remember these are signals, not rules.
 
The first conclusion I drew from this OHLC chart was that AMZN stock didn’t seem to give a hoot about the consumer price data on Aug. 28. The stock doesn’t appearto have been unusually volatile that day. That month won’t tell me that much.
 
But I did note the big gap between the closing price of Aug. 30 and the opening price of Aug. 31. Not surprisingly, Amazon reported earnings after the close on Aug. 30 and the Street reacted positively.

 

Candlestick Charts


Example of a BOLT Chart

 A candlestick chart uses all the information available in the OHLC chart but makes it slightly easier to read.
 
Instead of marking the open and close with short linesto the left and right of the range, the candlestick colors in the range with red or green to indicate whether the day was positive or negative. If the day was negative, the box is red. The top of the box is the opening price and the bottom is the closing price.
 
The lines above and below the box remain the same as the OHLC chart. They indicate range. If the box is colored green, then the bottom of the box is the opening price and the top is the close.
 
Just as with line charts, you can change each bar torepresent anything from a stock tick to a year. The interpretation remains the same. The advantage of the candlestick chart over the OHLC chart is that it’s easier to tell whether a bar was positive or negative without staring at it. OHLC charts can start to blur if you stare at them for too long.
 
Note that I haven’t mentioned how to interpret chartpatterns. Human beings are pattern recognition machines. Many traders could look at this chart and confidently express a buy or sell opinion.
 
You won’t hear that too often in BetterInvesting circles, but technical analysis remains popular in the financial media because it’s sound bite friendly: “The stock hasbeen steadily establishing a base on declining volume,” sure sounds impressive.
 
There are stacks of books on how technical analysts use these charts to predict stock moves. Many chartists don’t even glance at a stock’s fundamentals, believing that all the fundamentals are already baked into the price. As much as a picture might be worth a thousand words, many of the rules technicians cite sound appealing but haven’t held up well under careful scrutiny. But charts do provide a quick way to look at market action and begin to investigate what might be driving a stock‘s or even a market’s price.

Example Candlestick Charts

 

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This article was originally published in the November 2020 issue of BetterInvesting Magazine.

Sam Levine is a frequent contributor to
BetterInvesting Magazine. He teaches securities analysis and portfolio management at Wayne State University.
 

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