'Price Is Truth': Analyzing Stock Chart Performance Using Technicals

Traders are always looking to get an edge in the market, and one of the most popular tools at their disposal is technical analysts. At the Benzinga Trading Boot Camp on Friday, Douglas Busch, founder of ChartSmarter, outlined the basics of reading and interpreting stock charts using technical analysis.

Bullish Flag

The first of Busch’s favorite technical indicators is the bullish flag formation. A bullish flag formation is formed when a stock has a large vertical rise followed by a period of sideways or slightly negative consolidation.

“It’s a continuation trend, which means the stock is already in an uptrend and it’s just going to continue higher,” Busch said.

“The bull flag, we’ve seen a lot of that lately with this big move in the market. We kind of want to see that digestion. Nothing goes up in a straight line. Nothing is parabolic.”

Other Indicators

The next topic Busch discussed was round number theory. Round number theory is the idea that traders see round numbers as key entry and exit points, so these numbers often provide near-term support and resistance levels.

“Presently we have the S&P at around 3,000, that’s its 200-day moving average and that’s a big round number….If you want to go back a year or two, bitcoin reversed at the round $20,000 number. If you want to look at that cannabis stock Tilray Inc TLRY...I believe the intraday [all-time] high was $300 precisely,” Busch said.

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Busch also discussed the cup-and-handle pattern, a bullish pattern that forms when a stock makes a short pullback after a relatively deep, rounded dip and recovery. The resulting pattern resembles a teacup with a small handle.

“Cup-with-handle is probably one of the oldest and most basic patterns,” he said. “What the handle does with the cup-with-handle is it shakes out a lot of the weak holders.”

After those weak holders are gone, the stock is free to resume its uptrend.

Technicals Vs. Fundamentals

Busch also spoke about the relationship between technical analysis and fundamental analysis based on metrics like revenue and earnings growth.

“I’m a big believer that the technicals and the fundamentals complement each other. Usually, people focus on one thing or the other… But at the end of the day, I’m a price guy. Price is truth, and I make all my decisions based on the technicals,” he said.

For now, Busch said he’s concerned about the outlook for the S&P 500 and the SPDR S&P 500 ETF Trust SPY and given how important the 3,000 resistance level is for the market from a technical perspective.