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Invest in the Best

Before getting into the specifics of chart pattern analysis, let’s look at a more traditional investing concept – invest in the “best” stocks. I use the word “best” in the popular concept of the highest quality stocks at the moment, stocks that traditionally would be put in your grandfather’s retirement portfolio, stocks that have had a great record for growth and/or steady dividends.

Let’s start with the bluest of all blue chips – IBM – otherwise know as Big Blue:

Look at a chart of IBM stock:

IBM

Chart courtesy of TeleChart- www.worden.com

If you purchased the stock on July 24, 2008 at 130.00 and sold on December 20, 2008 at 71.74 you would have lost 45% of your investment in a period of 5 months. But this is Big Blue, how could that happen! In any case you think you would not be so foolish to have bought at the high of 130, but at that moment the stock had been going up and up, everyone was buying. On the other hand you are sure you would not have sold at 71.74, but the poor investor at that point had been watching his investment sink lower and lower and finally in total frustration decides to sell and salvage what he can. Read into the chart and try to picture what the investor is thinking about his investment at each point on the chart.

When an investor purchased on July 24, 2008 at 130.00 it was after a huge rise extending back to August 2006 when it sold at a price of 73. He watched it going up almost every day. Finally he makes his move and buys expecting the stock to continue rising. When it drops to 110 he expects this to be a temporary glitch, the stock taking a rest preparing for the next move up. It does move up to almost 124 confirming his belief that the next big move up is about to start.

Then it drops to 87. He is now seriously worried and decides to get out on the next move up to 110. It does bounce about in a range between 80 and 95 convincing him his target to sell at 110 in correct. Instead the stock collapses to 71.74. At that price he decides to get out with whatever he can salvage from this sour investment. He is devastated having invested in the bluest of blue chips and now having lost almost half of his investment in 5 months.

Now let’s look at another blue chip stock – Microsoft. This certainly is one of the top most celebrated companies in the world.