Many investors ignore price charts. Even those who are aware of them and sometimes use them tend to do so inconsistently. But in my humble opinion, to ignore price charts, especially in an uncertain market, is flirting with disaster.

Below, I offer simple guidelines to make sense of price charts, even if they’re loaded with indicators. If the current configuration of my favorite indicators is correct, we may be setting up for a significant move in the stock market.

Moving Averages

A moving average (MA) is a dynamic trend line which smooths out the price trend and stays current by its daily adjustment.

There are three generally accepted MAs on a daily price chart:

• The 20-day MA – smooths out the short term trend (days);
• The 50-day MA – measures the intermediate term trend (days to weeks); and
• The 200-day MA – catalogs the long term trend (weeks to months).

Generally, when prices are above a moving average, they are considered to be in an uptrend. The opposite is true when they fall below these key indicators.

Bollinger Bands

These are the bands that form the price envelope above and below the 20-day moving average (green lines). They measure price volatility. Moreover, when they close in toward the MA they signal that volatility is decreasing and that a big move, up or down, is likely.

Note that the bands got closer together in July and October 2021, which preceded sizeable moves to the up side.

Equally important is the fact that when prices rise above the upper band or fall below the lower band, it signals that a trend reversal is likely. Note the price bounces in February and March of 2022, which followed prices falling outside the lower band.

Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV)

These two indicators are measures of money flow with important differences. First the similarities:

• Rising ADI and OBV signal money is flowing into a stock or index.
• Falling ADI and OBV are signs that money is moving out.

Now the all-important differences between the two:

• ADI is a better measure of short sellers behavior. When ADI is falling, it’s not just a sign of ongoing selling but also a sign that short sellers are active.
• OBV is a reliable sign of the seriousness of active buyers.

When ADI is falling and OBV is rising, it’s often a sign that an important bottom may be nearing because short sellers are losing their effectiveness.

RSI and ROC

The Relative Strength Index (RSI) is a measure of the oversold or overbought status of a stock or an index. When the RSI falls below 30 it signals an oversold status. On the other side, an RSI reading above 70 means that the stock or index is overbought. A rising RSI is bullish while a falling RSI is a sign that investors are taking profits.

Rate of Change (ROC) is a momentum indicator. Generally, ROC behaves similarly to RSI except it is best used to gauge the general momentum of a trade. It’s best to pay attention to RSI when it changes direction.

Volume By Price

Volume By Price (VBP) has over time become my go-to decision maker indicator. That’s because these large bars on the left side of the price chart are hard to miss, and they catch my eye better than just about anything else.

This one’s pretty simple. The larger the bar, the more meaningful the price area is as a support level (where buyers come in) or as a resistance (where sellers take over).

Putting It All Together

Let’s look at this recent price chart of the S&P 500 relative to our indicators.

• Moving Averages – The index was trading below its 20 and 200 day moving averages but slightly above its 50 day MA. This is a sign that the market is uncertain about the direction of prices over the next few days and the long term but that the intermediate trend may be favorable.
• Bollinger Bands – The bands had been closing in on the 20-day moving average prior to the big move up in prices we saw on 4/19/22. Also note that as the bands shrunk in width the market was consolidating above the lower band. This is a sign that buyers are building position in expectations of higher prices and shows how prescient this indicator can be in predicting big moves in the market.
• Accumulation Distribution – This indicator had been rising since February, a sign that short sellers were not very active in the market.
• On Balance Volume – OBV had been flat to lower over the same period. This was a sign that although short sellers were not very active, neither were buyers taking meaningful positions. Together, these two indicators explain why the market was so twitchy during this period of time.
• RSI – This indicator bottomed out in February and made a higher low in March when SPX made a lower low. This double bottom in RSI is usually a sign that the selling has climaxed and buyers can operate with lower risk. RSI having trouble near 50, however, suggests that there is still doubt in the market.
• ROC – This gauge confirmed the bottom in RSI and the market but like RSI has been up and down. This generally trendless pattern also confirms indecision in the market.
• Volume By Price – The biggest VBP bar on this chart corresponds to the 4500 price area on SPX. It is also where the 20, 50, and 200 day moving averages are clustered. And that is a sign that this is where the big action will take place.

Bottom Line

The stock market is still trying to figure out its next move. However, when all the indicators are taken together, it’s clear that whatever happens at the 4500 area for SPX will likely be the deciding factor.

From a decision making standpoint it’s crucial to monitor this key price area and then act accordingly once the market makes up its mind. In volatile markets, a detailed price chart analysis can be a very useful exercise.

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