Chart patterns of Google stock and other Big Tech names might be causing anxiety for investors as higher rate fears chill markets. Stay focused on the underlying chart patterns by sticking to three price phases.
David Keller, Chief Market Strategist at Stockcharts.com, tells Investor's Business Daily's "Investing with IBD" podcast he watches for several price pattern phases when analyzing charts: the setup, the trigger and the follow-through.
By focusing on the phases in Google stock rather than trying to interpret every tick, Keller says Google parent Alphabet and others like Amazon and Apple can provide potential safe havens for longer-term investors.
The first part is to identify the setup, looking at patterns he sees in charts like cup-and-handle movements or head-and-shoulders tops.
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Keller starts by flipping through chart after chart; using alerts and screening for stocks making new relative highs. "I'm not looking at every chart and saying 'Am I going to buy this or not'; I'm looking for a pattern."
Patterns For Google Stock And S&P 500
To illustrate the setup, Keller points to Google stock, where traders are often tempted to buy in once they recognize patterns. "It's thinking about the longer trend, but recognizing what's the level, what's the opportunity that makes sense," he says.
The S&P 500 is another example, where a daily chart shows a head-and-shoulder pattern composed of a high in late July and early August, surrounded by a lower high that peaked in June and a lower high in September.
Next comes the trigger, which indicates a chart pattern is valid and is more than just market noise. In the S&P 500, Keller points to the "neckline," formed by the two troughs between peaks.
"That basically shows you that the pattern is being created," says Keller. But without that important trigger, it's just noise. "Until you actually break the neckline, it's not technically a head-and-shoulders pattern."
Triggers And Confirmations
Once a trigger is hit, Keller's third step is to wait for a follow-through, a confirmation that something actionable is happening. "A lot of times we get whipsawed because we see a pattern happen and then we immediately take a trade," says Keller. "The market goes against us and we miss it."
"We kick ourselves because we feel like it just didn't work," according to Keller. "The reality is it didn't follow to wait for that confirmation, which is that third step."
Keller says to look for some indication it's confirmed movement and not just noise. Watching for confirmation can protect investors against knee-jerk reactions to market moves, such as how this week's pullback in Google stock does not change Google's continued uptrend, or its use as a relative safe-haven to rotate into.
"What I like about a chart like Alphabet is that it's the longer term trend," says Keller.
Compare with what Keller is looking for in the S&P through the head-and-shoulders pattern: movement past the neckline. He says it's action he hasn't seen yet. "Is it forming a potential distribution pattern? Absolutely. Is it completed yet? I don't think it has yet," he says.
Keep Calm And Trade On
To identify the follow-through, Keller says to set a level, particularly in clear technical chart patterns. Speed is critical. "The moment you start to see further sell-offs after that initial break, that's when it can be a quick waterfall decline," says Keller. "What's most important is you have a risk management strategy."
But risk management also means not fixating on any particular stock or market, says Keller. He says to recognize what the ideal chart looks like for you as an investor, then continuing to move through the charts to find opportunities when they come. "Three month highs gives me a good working list, and then I go through those just to review the patterns and see which ones are actionable right now," says Keller.
Keller points to gas station and convenience store operator Murphy USA . "To put it simply, I like stocks that are going up and I don't like stocks that are not going up," he says. "I feel like too often we try to complicate way more than that."
He points to the cup-and-handle chart pattern for MUSA stock that began last October, with a handle forming in May this year. Shares of the company began rising afterward, forming a pivot point last week.
Reassessing your roster also helps separate top performers and rotates investors out of underperforming holdings. Keller says to keep "a laser focus on relative strength, meaning you want to own things that are doing better than your benchmark, and not own things that are doing worse than your benchmark."
Staying Disciplined
Discipline is also necessary for traders using the three price pattern phases. In the search for chart setups, Keller says traders often draw conclusions — both good and bad — too quickly.
"This is where a lot of people start, but then they immediately skip the other two phases and just make a decision based on that," says Keller. To keep his gut in check, Keller sticks to his three-phase assessment and says not to skip a step. "Thinking fast is always how we're wired, and unfortunately for our investing journey, that's why we're wired to make poor decisions," he says.
"If I could encourage anything, be patient and recognize that they are three steps that happened in that order," he says.
Google Stock Pullback An Opportunity?
He points again to Google stock, where investors fear it might be too late to buy in, and says to look at the chart patterns using the three phases. "Looking for good strong charts, ideally pulling back a little has been a good opportunity," says Keller. "Market history is filled with good charts that have gotten better."
But watching for risk is another important half of Keller's overall strategy. "Individual investors often want all the upside and none of the downside. They want all the benefit, but then perfectly hedged," says Keller. "An institutional investor would tell you that's obviously not ever going to happen."
The only way to grow money, however, is to think about the process — and not shy away from taking chances. "It's all about recognizing potential return and potential risk," he says.
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