There's a secret to interpreting stock charts. The secret is to look to the four seasons--spring, summer, winter, and fall.
What does the spring season, for example, have to do with a stock? In spring, the land is fertile and experiencing new growth. Likewise, a spring stock will experience new growth in its spring phase.
A spring stock springs out of the ground where it has lain fallow for quite some time.
Spring stocks are easy to identify because they are going up in price. The chart for a spring stock is up, up, and up.
This is not the actual season of spring but spring in the sense of a season of growth for a stock. Spring can happen at any time of the year and is not limited to 3 months.
In the summer season, growth peaks. Plants grow fastest in summer. In fact, corn grows so fast in August that farmers can hear it making growing noises at night as the growing corn breaks new soil.
Likewise, the summer phase for a stock is characterized by activity. This is when trading volume is highest. This is also the time when the stock price is unable to advance further. There is no better time to sell a stock than in summer.
Not the summer season of the calendar, obviously, but the summer season for the stock. Lots of stock changes hands when a stock is in its summer phase.
Summer is easy to identify. A summer stock experiences both high volume and broad price swings but just can't seem to advance any further up the chart.
Why? Because during summer, buyers and sellers are in perfect balance. While many people are trying to get out of the stock, just as many of them are trying to get in. The price goes back and forth wildly as two equal forces fight it out.
Summer is the shortest season of the four because a battle of this level of intensity is unsustainable. Eventually, the sellers win out over the buyers and the fall season begins.
A stock falls in its fall phase. Its price goes down.
Because the buyers are deserting the stock during the fall phase, the volume of stock changing hands becomes less. It takes more volume to raise the price of stock than it takes to make the price go down.
Eventually the stock becomes so attractively priced that the buyers and sellers become balanced again. The buyers and sellers coming into balance again after the fall season marks the beginning of winter.
Think of summer and winter as seasons of balance for a stock and spring and fall as seasons of imbalance. In spring, there are too many buyers. In fall, there are too many sellers. Fall ends and winter begins when balance is re-established.
You can identify a winter stock because it is flying flat across the chart like a bird that is migrating a very long distance for the winter. The price does not go up or down but trades in a narrow range. As winter goes on and on, this trading range becomes narrower and narrower.
In winter, its as if the marketplace is becoming more and more accurate in its pricing of the stock. The price range of the stock narrows and narrows as the price becomes more and more fine tuned.
As the price becomes more fine tuned, the volume goes down as people lose interest in trading the stock. It takes movement to get people excited and there is nothing more unexciting to most people than a winter stock.
In terms of time, the winter season for a stock is sometimes the longest. It is possible for a stock to stay in the winter phase for 5 years or more.
Winter is also the most important phase for the underlying company. It is during this time that the company rebuilds itself. Like a farm field in winter, the company lies fallow while preparing new products, services, and marketing campaigns for the public.
A company that stays in the winter season for a long time is actually a very good company. Why? The fact that the company is able to maintain a steady price means that it is a very stable company in a stable business with stable customers. The longer the winter season, the stronger the company and the more dramatic the effect when spring comes.
Spring inevitably follows winter.
Likewise, a company that stays in the winter phase for a long time is a good candidate for new price growth at a later date. Such a company that is stuck in winter can be called a flat flyer and should not be overlooked just because it is not going up in price.
A flat flyer is spring loaded. The longer it flies flat, the more dramatic the rise when the stock finally takes off again in spring.
The best time to buy a stock is in the late winter and early spring phases. This is the right time because the price of the stock has just started to rise but has a considerable momentum left before it is time for summer again.
How do you identify stocks in late winter? Look for flat flyers with underlying earnings and revenues that have been increasing all winter long. The longer that this has been happening, the better the company.
©Edward Abbott 2003