3 Clues To Look For In Amazon, Nvidia, Netflix

Learning how to read stock charts (i.e., technical analysis) is one of the most important investing skills you’ll ever learn. You can greatly improve your stock picks by using charts to pinpoint when to buy stocks. And when the market is down, like in the recent bear market, stock charts help you see when to sell stocks to protect profits and avoid big losses. Using examples from stocks like Nvidia (NVDA) and Netflix (NFLX), you can see how to use stock charts to handle stocks on the way up — or down.

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While stock charts are pivotal to understanding how to make money in stocks, technical analysis is only part of the equation. You also need to understand the story behind the stock, including a company’s fundamentals, industry trends and related factors. Finally, tracking the health of the broad stock market indexes is crucial since three out of four stocks follow the overall market trend.

So when is the best time to buy stocks?

History shows that growth stocks like NVDA, NFLX, Alphabet (GOOGL), Amazon (AMZN) and countless others make their biggest moves as they break out of sound chart patterns in a healthy market uptrend.

By using stock charts, you can objectively track stocks to buy and watch by seeing how they act around key moving averages. As you’ll see, understanding the chart action around the 21-day, 50-day and 10-week lines helps you decide whether to buy, sell or hold.

How To Read Stock Charts: Part 2 Of A 3-Part Series

In part 1 of this series on chart reading for beginners, we answered two basic questions: Why use charts? What’s in a stock chart?

In this second installment, we go over three telltale clues to look for in a stock chart to hone your stock-picking skills. These clues help you pinpoint the best time to buy stocks and when to sell or hold.

In a strong market, once you know how to spot these signals and understand the concepts behind them, you’ll be ready to capture solid gains with the three most profitable chart patterns.

In a volatile or down market, these same three indicators provide early warning signs that it’s time to reduce your risk and lock in gains.

TIP: Find stocks in or near a buy zone with the IBD Breakout Stocks Index.

Find Stocks That Fit Your Own Criteria With IBD Stock Screener

Technical Analysis: Keep It Simple

It’s easy to overcomplicate chart reading. But as we saw in part 1 of this series, charts simply tell you a story. And to understand what tale is being told, you really just need to answer the three basic questions discussed below.

So when it comes to how to read stock charts, keep it simple. You’ll be surprised by how much you can learn about the health and potential of a stock just from these three clues.

Editor’s Note: If you come across terms or concepts you’re not familiar with, check out How To Read Stock Charts: Part 1 of this series for more details.

1. How To Read Stock Charts: What’s The Trend?

The first question to ask when looking at a stock chart is, “What’s the trend?” There are basically three possibilities: uptrend, sideways, downtrend.

As simple as that concept may sound, it’s also quite important. You want to buy stocks when they’re going in the right direction — up.

Take a moment using IBD charts to identify the trends for Netflix, Nvidia, Amazon, Alphabet or any stock you’re tracking. Start learning how to read stock charts by first identifying the current trend in these stocks to watch.

Why buy a stock that is clearly heading south? Yes, it may eventually find a bottom and reverse that trend. But why jump in when it’s headed the wrong way? Wait until it shows clear signs of renewed strength and begins moving in the right direction.

When a stock is moving sideways, there’s no clearly defined trend. You don’t know if the stock will jump higher or take a nose-dive. Again, why take the risk at this stage? You’re better off waiting for the stock to show signs of a new uptrend.

Understanding if we’re trending up, down or sideways is especially important when trying to navigate stock market volatility.

2. What ‘Story’ Is The Stock Chart Telling?

Stock charts tell a story. They show you if a stock is being heavily bought or aggressively sold by large investors. But the only way to decipher that story and begin understanding how to read stock charts is to look at the changes in share price together with the changes in volume (i.e., the number of shares traded that day or week).

Share prices of the leading stocks to watch fluctuate daily, up or down. To see if the buying or selling is serious — and to see if the underlying trend is changing — you need to check the volume.

For example, say a stock normally trades 1 million shares a day. If the share price rises or falls a bit one day and volume is around 1 million shares, that’s nothing unusual. But if the stock suddenly trades 3 million shares one day as it gains 5%, you know something is up. You want to pay particular attention to those kinds of unusually heavy-volume days or weeks.

Let’s look at some different scenarios and what they mean. While looking at the examples below for Netflix, Nvidia and others, keep in mind that these concepts never change. The companies, technology and stock market cycles will change, but the underlying concepts remain the same.

So after going through the points made on the charts below, take a look at a current stock chart for the same stocks or any others you want to review. This simple practice will help you interpret the story the chart is telling.

Price GAIN in unusually heavy volume: Look at the weekly chart for Netflix below. NFLX stock began one strong climb in 2016, then ran into resistance in July 2018. As indicated by the arrows in the chart, there were several weeks where Netflix’s share price rose sharply and volume also spiked. Even before the 2020 pandemic increased demand for streaming services as people stayed at home, Netflix stock was rising as the best mutual funds scooped up shares.

What story does such behavior reveal? That mutual fund managers and other large investors are aggressively buying shares. This so-called institutional sponsorship is exactly what you want to see. It’s these large investors that provide the fuel a stock needs to make a sustained climb.

See the current chart for Netflix. After hitting a new high in November, the answer to question No. 1 above — What’s the trend? — is quite clear. And look how the 10-week line became a line of resistance rather than a floor of support. After spending months below that benchmark, NFLX stock finally recaptured that 10-week line last month on a better-than-feared loss of subscribers.

In the chart example below, Nvidia, which rose 750% after being highlighted in the IBD 50, offers another example of strong institutional demand. In the daily chart, look how the stock was trading in a tight range right along its 50-day line in April and May of 2017 (1). The stock then gapped up on May 10 in volume 268% higher than normal (2). And note how volume continued to come in well above average as the stock moved higher in the days that followed (3). Large investors were clearly in buying mode. The stock spiked again in heavy volume on June (4).

Now see the latest stock chart for Nvidia. As tech stocks fell out of favor with the best mutual funds in recent months, Nvidia tumbled. Like Netflix, Nvidia stock is now showing signs of life as it retakes its 10-week line.

As the mix of big gains and sharp declines in Netflix and Nvidia over the years show, these chart patterns and telltale signs of both strength and weakness repeat year after year. By understanding what to look for, you’ll be able to use stock charts to navigate both the ups and downs.

Price DROP in unusually heavy volume: This is the exact opposite of the scenario above. A large drop in price accompanied by a big spike in volume shows that large investors are aggressively dumping shares. In other words, the selling is serious. As the example of 3D printing stock 3D Systems (DDD) shows below, it’s especially worrisome if the stock is crashing below the 50-day or 10-week moving average line when that happens.

Look how volume rose sharply as the stock crashed right through its 50-day line (1). And the same thing happened as the stock failed to find support at the 200-day line (2). These were both signs that after a big run before 2014, 3D Systems’ trend had changed.

Fast-forward to today. After a big gain from October 2020 to February 2021, 3D Systems reversed sharply lower. Like fellow tech names Nvidia and Netflix, the recovery in DDD stock is a work in progress, but shares have begun to retake some key moving averages.

Price GAIN in unusually light volume: If the share price is rising significantly, but volume is normal or below average, what does that tell you? It says that, at least for now, large investors are not buying aggressively. In other words, there’s not a lot of conviction for the move.

Such moves can turn out to be a head fake, which was the case for Old Dominion Freight Line (ODFL) in the chart below. The stock broke out from a base, but volume was well below average (1). On the day of a breakout, you want to see a 40% or larger spike in volume to show strong demand. Old Dominion fell well short of that.

In the days that followed, note how volume rose sharply as the stock fell (2, 3). So a light-volume breakout attempt turned into a heavy-volume sell-off. Such behavior is a clear sign that large investors are in selling, not buying, mode.

Price DROP in unusually light volume: When a stock falls but the number of shares traded is much lower than normal, it tells you that large investors are not selling aggressively. This is an important clue that can help you sit tight and hold on for bigger gains down the road.

The example of Ollie’s Bargain Outlet (OLLI) below proves that point. While Ollie’s was building a new flat base, note how volume on down weeks was below average (1). It was also finding support at the 10-week line. As the arrows in the chart indicate, the stock broke out of that base in heavy volume and showed several heavy-volume up weeks as the stock climbed higher for months. It’s a clear example of how you can see what fund managers are up to by looking for unusual spikes in price and volume in a stock chart.

Since falling into an extended downtrend in 2019, OLLI stock has yet to fully recover. But the discount retailer is showing signs of a potential rebound. In addition to retaking its 40-week moving average, note how the shorter-term 10-week line — which is trending higher once more — is back above the 40-week benchmark. Such action is a clear sign of rebounding technical strength.

3. Is The Stock Finding Support Or Hitting Resistance?

Last but not least, see if your stock is finding support or running into resistance at key lines like the 50-day and 10-week moving averages. Also look for support or resistance at important price areas, such as new or recent buy points in a chart pattern.

How your stock performs at these testing grounds reveals a great deal about its strength. Why? Because many fund managers and other large investors closely follow these benchmarks.

If these big players still favor the stock, they’ll often step in to pick up more shares and protect their positions when it pulls back to the 50-day or 10-week moving average. Their buying will keep the stock above those benchmarks. But if the stock crashes below the moving average in heavy volume, it’s a sign that large investors have shifted into selling mode.

Take Alarm.com (ALRM) as an example. As it was making a nice run in 2017, the stock consistently found support at its 10-week moving average (1, 2, 3). It was in a clear uptrend, and there were several heavy-volume up weeks — a sign of institutional demand.

But note how that trend changed toward the end of that year. The stock failed to find support at the 10-week line and crashed below it in heavy volume (4). After that, note how the 10-week moving average changed from an area of support to a line of resistance (5, 6).

To expand your understanding of how to read stock charts, take a look at how ALRM stock has behaved recently. It hit resistance in July 2020 then found support at its 50-day moving average in October. Alarm stock went on to form a cup-shape base, then broke out to a fresh all-time high. It entered a long slump, with its 10-week line forming a ceiling of resistance. Alarm.com is now testing resistance at its 40-week line as its 10-week moving average remains below its 40-week line.

Lines of defense: You can think of the 50-day and 200-day moving average lines as a stock’s first and second lines of defense. (On a weekly chart, the equivalents are the 10-week and 40-week moving averages.) If a stock fails to find support at the 50-day line, see if it can at least hold its ground at the 200-day moving average. In the case of 3D Systems discussed earlier, you can see how the stock failed to find support at either benchmark, and crashed below both of them in heavy volume (1 and 2, above).

Steppingstones: E-Trade Financial (ETFC) shows how stocks will often form steppingstones as they climb higher. This happens as the stock hits resistance (1) and pulls back, then finds support (2) and rises again. It’s very healthy action to see a stock turn a former ceiling of resistance into a new floor of support.

Editor’s Note: In October 2020, ETFC stopped trading after Morgan Stanley (MS) purchased E-Trade.

Technical Analysis: Bases, Buy Points And Breakouts

In the next installment of this series on chart reading for beginners, we’ll go over the three most profitable chart patterns: cup with handle, double bottom and flat base.

As we do that, you’ll see how each of the three telltale clues discussed above come into play:

• Each chart pattern or base must be preceded by a prior uptrend.
• The bottom of the base is an area of support, and the buy point is based on a former area of resistance.
• Breakouts happen when the stock punches through that area of resistance in unusually heavy volume.

You can also learn more about how to read charts — while getting timely stock ideas — with IBD Leaderboard. You’ll get alerts to stocks to watch, as well as ongoing highlights of bases, buy points and sell signals. It’s an excellent way to get real-time chart-reading tips while building an actionable watchlist.

Note that OLLI stock has just earned a spot on Leaderboard.

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