An art expert can look at a painting and spot a fake.
A veteran quarterback can look at a defense and instantly recognize the need to call an audible.
Savvy investors have a similar gift. They can look at a stock chart and see the odds tilting toward success or failure.
Are they geniuses? Probably not. If you study enough paintings, see enough defensive alignments or examine enough stock charts, then you will see more clearly. The gift that appears to be genius is the distillation of years of paying attention.
What do good chart readers see? The experienced chart reader is looking for signs of institutional money flowing into a stock as it forms a base. If the base doesn't show accumulation, then the stock is much riskier than those that do.
Look for these signs in a base: • Up weeks in fast trade. A stock rising in above-average weekly shows strong demand. You want to see more of those than down weeks in fast trade.
• Consecutive weekly gains. This is a sneakier form of accumulation. Five to eight weekly gains in a row, even in below-average volume, point to accumulation. Funds can spread buys over many weeks.
• High closes in the weekly range. A down week can be a sign of accumulation — if the stock closes in the upper 60% of the range in heavy trade.
• Gap ups. On the daily chart, gap-up action within the base is a sign of accumulation. Gap downs in the base point to distribution.
• Quiet volume at the bottom of a base. While this isn't accumulation, it points to an absence of distribution. The sellers are exhausted.
Online auction services provider Liquidity Services (LQDT) began sketching a base in June. 1 By the time the stock added a , the chart had a story to tell.
Among four down weeks with low closes, volume was 24%, 153%, 184% and 91% above average 2, respectively. Only one up week had above-average volume, 9% above average. 3 On the right side, there were five up weeks in a row 4 in weak volume — 29% to 62% below average. Not enough evidence of true accumulation.
The handle (see a daily chart) showed . After clearing the 55.43 entry, the stock gained less than 4% and then fell.