Hello! So hopefully you where able to read through the Chart Tools & Basic T.A. page without any problems… more than that hopefully you where able to understand how to use the tools.
This is Step TWO. We will be going through some charts, and hopefully this will give you a sense of how to analyze any other company you may want to look into. First let’s pick a chart/company to look at. Since you don’t really have a say in what company I pick, and because I have to follow this company for some investment groups I am in… we will be looking at Panera Breads (PNRA). So let’s just jump in and see what we come up with.
First we will start with a one year chart, with RSI showing and our 3 MA lines (20, 50, 200).
Now the chart MIGHT seem a little overwhelming at first… but let’s walk through it and you’ll see it’s not that hard to understand (and if you understood Step ONE it should make some sense). First lets start with simple work with the MA’s (moving averages). From June to September we see converging MA’s. Again from Step One you should recall that converging MA lines are a signal that a stocks price is becoming stable, and a stable stock is a good stock (hence we often see price move following converging MA lines). After the MA’s converge, we can see diverging MA lines. Alone this just tells us that the stock is in an uptrend with good strength. Let’s look at some other thing’s going on in this chart.
At A1, we see price drop to the 200 MA. We then see price bounce off the 200 MA and this should tell us that the stock intends to move higher from this point (if the rest of the chart was unknown). Let’s move to C1 and we can see that not only has price stabilized above the 20 MA, but the 20 MA has settled above the 50 MA. So now our moving averages are again in the 20, 50, 200 order that we talked about in Step ONE…
THAT’S GREAT!
This should have been your first entry into PNRA. RSI at that time, just crossed 50 which we know when RSI crosses 50 there is likely a trend reversal. Look back to April on the chart (there is a blue line on the RSI). Here we see RSI dropped to 50, did not cross below 50 and so price moved higher until it broke down in late April.
Looking at the next blue line on RSI, we see that RSI struggled to cross ABOVE 50 on the RSI for some time. When price bounced off the 200 MA, RSI easily stabilized over 50 and price moved higher. The bounce off the 200 MA is a very strong signal that you can easily trade on. Moving to the third blue line on RSI, we see that RSI hit 50 and maintained its stability over 50. Again price moved higher.
This may seem confusing I’m sure… here is the big thing were looking for on the RSI…
In August (the second blue line on RSI), RSI was 50, price was around 78 or 79 dollars per share. Move to the third blue line on RSI, and we see that RSI at 50… price is now at $90. There is a 10 dollar difference there!!
RSI is at 50 in both cases… but price is significantly higher in the second case. This shows us that the FAIR VALUE of the stock has increased from roughly $78 to $90. This tells us that the stock is in a STRONG uptrend.
At C2, we see price test its 20MA. After testing the 20 MA, it spikes up considerably. Then tests below the 20 MA, later to stabilize above it. The important part about price testing the 20 MA is that it does not sink down to the 50 MA, or else we might then consider price to be breaking down. Since this does not happen, it is safe to say that the stock remains in a strong uptrend.
So what does all of this tell us about the stock? Is it a good time to buy knowing it’s in a strong uptrend? Should we sell seeing that it’s current RSI is around 70?
Well it’s kind of hard to say… let’s say you don’t own PNRA and are looking to enter into a position.
Let’s look at another chart.
Here is the same one year chart, with the MA Envelope tool added (and the labels taken off).
If you remember from Step One… when price “bump’s” the envelope, we usually see price react. Recently price has bumped the top of the envelope, and has reacted by moving lower slightly. Price is currently still above the 20 MA, and RSI is still rather high. RSI alone being rather high should tell you that NOW IS NOT THE BEST TIME TO ENTER INTO A POSITION. The MA Envelope confirms this as it says that price has in a sense peeked, and is likely to move slightly lower. How much lower, I don’t know. Will it crash and lose $30 is share price?? Not likely considering IT IS STILL IN A STRONG UP TREND. However it does tell us that now is not the best time to buy.
So what would be a good time to buy?
When RSI is below or around 50, it is a good time to buy. When price crosses below the 20 MA, this is a good time to buy. If price crosses below the 20 MA and sinks to the 50 MA, that’s and even better time to buy!! If price sinks past the 20 MA, and goes LOWER than the 50 MA…. WAIT and see what happens when price nears the 200 MA. If price is nearing the 200 MA, you are either going to see price dramatically drop, or maintain its upward trend.
So… by these terms, you should look to buy at the 20 MA around $100 a share. This should be a SMALL purchase, as price is still some what high. If price gets as low as it’s 50 MA around 95… you should buy with moderate strength. If price nears the 200 MA around 85… you should WAIT!!! See what happens around the 200 MA, and then react.
Now we know how to identify the current trend by looking at RSI and converging or diverging MA’s, and now we know how to time purchases!! (using the 3 MA’s and an MA envelope).
So the overall opinion on PNRA right now… is wait to buy. Hopefully we can see price drop down to near 100 again, the next time it’s price tests the 20 MA, and make a move to enter into a position.
BUT WAIT… can you figure out why price is not likely to drop to the 200 MA?
Hint: look at the MA envelope and the 200 MA.
Because the bottom of the MA envelope is above the 200 MA, we know that it is not likely to drop that low any time soon. So consider entering a position at the 20 and 50 MA marks, or when RSI is near 50.
Knowing that PNRA is in a strong up trend… we want to wait for ANY WEAKNESS IN PRICE to buy, and then jump on it. How aggressively we jump on the weakness in price is AGAIN determined by where price is. At the 20 MA, maybe a slight purchase would be appropriate (test the water’s), if we go lower to the 50 MA then you still have money to buy more aggressively at a lower price knowing that there is a strong uptrend in PNRA.
Hopefully you where able too:
- Identify buying and selling opportunities.
- Identify how aggressive to buy.
- Identify RSI 50, and correlations between price. When RSI is 50, what is price? Does price at RSI 50 change over time? What should this tell you?
- Gain SOME insight into price testing MA’s, and the importance of each MA line in a buying strategy.
- Identify a strong uptrend in PNRA.
Now that we have some practice using some of the earlier mentioned tools, lets turn to looking at what makes a good and bad investor. Please procede to Step Three which is a page along the top of your screen titled “Understanding Information”.
**All charts are from TD Ameritrade. Some charts have been altered by MoneyJog.com for explanation of the tools.