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Intraday Charts Are Noisy, But They Can Be Useful

Intraday charts can be useful, but they also can be misleading.

The misleading part is that they create a lot of noise.

The investor who lives and dies by the intraday chart probably won't be able to hold a stock for long. Some disturbance in the intraday chart will drive the investor out for no good reason.

The general rule is that the shorter the time period of a chart, the more random noise you'll get. That's why experienced investors begin by looking at a weekly chart, rather than a daily chart.

The weekly chart smoothes out some of the irregularities and lets the investor see a bigger picture.

In many instances, the intraday chart says more about the investor than it does about the stock. If an investor has done his or her homework and knows the temperament of the stock, there's usually no need to consult the intraday chart after buying shares.

The question after the purchase becomes: Is the stock's action on the weekly or daily chart normal or abnormal? Investors who feel the need to watch every five-minute movement may be showing a lack of confidence for a good reason: They didn't do their homework.

Researching a stock thoroughly leads to conviction. Sloppy and rushed research leaves the investor uncertain.

So, what are intraday charts good for? The intraday charts have two main uses.

In "How to Make Money in Stocks," IBD Chairman and founder William J. O'Neil noted that the intraday chart can have value at key market junctures.

"A good time to watch hourly volume figures is during the first attempted rally following the initial decline off the market peak. You should be able to see if volume is dull or dries up on the rally. You can also see if the rally starts to fade late in the day, with volume picking up as it does, a sign that the rally is weak and will probably fail.

Another key turning point is "when the market averages reach an important prior low point and start breaking that 'support' area," O'Neil added.

If the sell-side volume accelerates sharply as the indexes hit new low ground, that points to institutional selling.

For individual stocks, intraday volume can be useful when looking for breakouts from bases. Investors.com's "Stocks On The Move" feature on the home page shows stocks moving up or down in strong intraday volume.

O'Neil wrote, "Volume percentage changes on an intraday basis will tell you — as it is happening — if a stock is trading above or below its average daily volume of the last 50 trading days. That's a sign of institutional buying (or selling).

Investors need to be careful, however, when checking intraday volume on a breakout. The beginning and end of the day are often when volume is strongest.

A strong open, particularly if the investor is only looking at the first 20 or 30 minutes of trade, can give a false signal. Don't be overly eager. There have been cases when breakout volume is sufficiently strong at the open but later fizzles to a routine pace.

If you buy on an early volume spike, be prepared to re-evaluate the buy if volume fades. You can either unwind the position and wait for true breakout volume, or you can watch the stock closely and be ready to exit. Sometimes the big volume comes a bit late on a breakout.