Bullish or Bearish? The chart can tell you

by Markay Latimer

You can easily be overwhelmed by the amount of information available on the financial television programs. The data flies at you in all directions, verbally from the host of the show and their guests, and visually from the stock data and news that crawls along the bottom and sides of the screen. You can get frustrated by this fast flow of facts and figures, which can leave you convinced that only a genius can make money in the stock market.

Wrong.

You don't need a PhD in economics to learn how to trade the market. Too often we make the process harder than it needs to be. Sometimes we are our own worst enemies, because we want to absorb all the information that's available before we make a decision. Often this leads to indecision or no decision.

The good news is you don't have to be an economist to trade these markets. You only need to be aware of a market-moving event, and observe how it is being interpreted by investors or traders.

When news is released, look to the stock's price chart for an indication of which direction to trade. It will usually provide some clear signals. The price chart is the most important thing to view when making a decision to enter a trade.

• If you see a bullish pattern, where stocks are going up, we can infer that traders are happy with the news. This gives us a signal to trade bullishly.

• If you see a bearish pattern, where stocks are going down, we can infer that traders are unhappy with the news. This gives us a signal to trade bearishly.

This has been apparent in several news events over the last few months. The way the news was interpreted by traders and investors had a huge impact on the movement of the market.

On Feb. 9, U.S. Treasury Secretary Timothy Geithner unveiled the government's initial plans to overhaul the bailout process. You didn't have to know or understand what he was saying to realize that traders were disappointed. As stocks sold off heavily, the charts began to look very negative and gave us the information to trade bearishly. (We found out later that investors were disappointed about the lack of specifics in Geithner's announcement.)

On Feb. 24, Federal Reserve Chairman Ben Bernanke presented a monetary policy report that was well-received by investors. While trading that day in the Technically Speaking class, we saw a lot of bullish patterns in the market. As a result, we entered a bullish trade on Goldman Sachs (GS) when the stock was already up about $5. By the end of the day Goldman was up $12.91. (It was later in the day that we found out Bernanke told Congress that the banks would probably not be nationalized and that the recession could end this year.)

On May 23, Geithner had better luck. Word leaked over the weekend that a plan to deal with the toxic loans would be rolled out on Monday. Investors interpreted this as great news and sent the Dow up almost 500 points. (We later learned that the Public-Private Investment Program, as well as surprisingly good news about home sales, helped create the big bullish move.)

In all three examples, we didn't wait to read the news, and then analyze it, and then figure out what direction to trade. Instead, we looked at the charts to see if the people – some of them smarter than us, some of them just closer to the situation -- liked the news. If the charts are bullish, we know these traders like the news and we can enter a bullish trade. If the charts are bearish and moving lower, we know there was something the traders didn't like and we can trade that bearish reaction.

We don't care which way it moves, but we do want to make sure we're on the right side of the trade. Take out the guesswork and let the chart tell you the direction to trade.

You have great opportunity to learn more about how to read a stock's chart. Attend my Charting Made Simple online class on April 18 and we'll spend four hours learning how to master the price charts without getting bogged down in the details. This class is packed with great information that can take your base of knowledge to the next level.