The CUP and Handle Pattern (developed by William O'Neil, How to make money in stocks)

 

The Cup and Handle Pattern: Finding a Proper Breakout Buy Point

If you have spent any time looking at stock charts, there is a decent chance you have already seen a cup and handle without knowing its name. It is one of the most recognizable patterns in technical analysis, and it comes from William O'Neil's 1988 book "How to Make Money in Stocks." O'Neil, who founded the newspaper Investor's Business Daily and the CAN SLIM investing method, studied decades of the market's biggest winning stocks and noticed that a striking number of them shared the same chart shape right before their largest gains: a long, rounded dip that looked like a coffee cup, followed by a short handle hanging off its right side.

The pattern has stuck around for almost forty years for a simple reason: it is not really about the shape itself, it is about what the shape tends to represent. A cup forms when a stock rises, sells off, trades sideways for a while, and then slowly climbs back to its old high. That round trip usually reflects a real shift in supply and demand. Early sellers get washed out, the stock finds a floor, and buyers gradually take back control. The handle, a smaller and shallower pullback near the top of the cup, often reflects one last round of nervous selling before a stock is free to make new highs. None of this is guaranteed, and we will spend real time later in this article on how often it does not work out. But understanding why the pattern tends to show up is what makes it useful, rather than just a shape to memorize.

In this article we will define the pattern in plain language, walk through a real, recent example on Apple (AAPL) built from actual weekly price history, point out exactly where the textbook description and the real chart agree and where they do not, and close with a practical checklist and an honest look at the pattern's limits.

What a Cup and Handle Is, and How to Read It

Start with a few terms. A base is simply a period where a stock stops trending and instead moves sideways or corrects, digesting its prior gains before (hopefully) starting a new advance. A cup and handle is one specific type of base. Resistance is a price level a stock has had trouble climbing above in the past, often because sellers show up there; support is the opposite, a level buyers have defended before. A breakout is when price finally pushes through a resistance level with conviction, usually identified by a weekly or daily close above it on volume that is noticeably higher than normal. The exact price at which that breakout is confirmed is sometimes called the pivot point or buy point.

With those definitions in hand, here is the shape itself. A cup and handle begins with a stock making a high, which becomes the "rim" of the cup. From there, the stock pulls back and, instead of recovering quickly in a sharp V shape, it rounds out gradually: it drifts lower, stabilizes, and then slowly grinds back up over a period of weeks to months. That gradual, bowl shaped recovery is the "cup." O'Neil's own guidelines suggested cups typically run somewhere from about seven weeks to many months, and that a reasonable cup depth is usually in the rough range of 12 percent to 33 percent off the old high, though deeper cups can and do occur, especially during broader market weakness.

Once the stock climbs back up near its old rim, the pattern is not finished. Before it is ready to break out to new highs, many stocks pause one more time, pulling back modestly in a shorter, shallower dip called the handle. A well formed handle usually stays in the upper portion of the cup, often does not give back more than roughly 8 percent to 15 percent, and lasts anywhere from a few days to a couple of weeks (longer on weekly charts). The handle's job, in a sense, is to shake out the last of the short term, nervous sellers so that the stock can move higher without them getting in the way. The actual buy signal comes when price breaks above both the old rim and the handle's own small resistance level, ideally on volume that is clearly above the stock's recent average. Volume is not a minor detail here. A breakout on light, unenthusiastic volume is a much weaker signal than the same breakout on heavy volume, because volume is the clearest evidence that real buying demand, not just a few scattered trades, is pushing the price through resistance.

AAPL weekly closing price, December 29, 2023 through November 6, 2026. The dashed line marks the cup's old high (about $288.62, set the week of December 5, 2025). The stock fell to a cup low of about $243.42 in late January 2026, a decline of roughly 16 percent, then spent the following months rounding back up. The shaded band marks the handle, a shallow pullback that formed in June 2026 after the stock had already pushed back above the old high. The green marker shows the breakout week in mid July 2026.

A Worked Example: AAPL's Cup and Handle in 2025 and 2026

Rather than describe the pattern in the abstract, it helps to walk through an actual instance of it using real weekly price data. The numbers below come directly from AAPL's weekly open, high, low, close, and volume history.

The left side of the cup begins with AAPL making a high of about $288.62 (intraweek) during the week of December 5, 2025, with that week's close at $278.78. From there the stock slid for roughly seven weeks, bottoming during the week of January 23, 2026 at a weekly close of $248.04 and an intraweek low of $243.42. That low represented a decline of a little under 16 percent from the rim, a depth that sits comfortably inside O'Neil's classic range for a healthy cup, not so shallow that it looks like noise, not so deep that it suggests something is seriously wrong with the stock.

From that January low, the right side of the cup took shape over the following three and a half months. AAPL ground higher through February, March, and April of 2026, clearing $270 by mid April and finally pushing back above the old rim during the week of May 8, 2026, when it closed at $293.32. In a textbook diagram, this is usually the point where a handle would begin to form. In the real data, AAPL kept running for a few more weeks instead, climbing all the way to an intraweek high of $317.40 during the week of June 12, 2026, before finally pulling back. That is a useful, honest wrinkle for anyone learning this pattern: real charts rarely match a diagram exactly, and a handle can form later and higher than the simplest description suggests.

The handle itself ran from that mid June high down to an intraweek low of $273.75 during the week of June 26, 2026, a pullback of close to 14 percent from the handle's own high. Worth flagging honestly: that low dipped slightly below the original cup rim of $288.62, which is a bit deeper and a bit messier than the idealized version of this pattern, where the handle is supposed to stay closer to the upper third of the cup. It is also worth noting that the week of that low carried unusually heavy volume, more than double the stock's trailing 52 week average weekly volume. A sharp, high volume dip like that inside a handle is sometimes a warning sign of real institutional selling rather than just a shakeout, and it is exactly the kind of detail a careful chart reader should sit with rather than wave away, even when, as happened here, the stock went on to recover.

The breakout followed quickly. AAPL rallied back to $308.63 the next week, then $315.32, then closed the week of July 17, 2026 at $333.74, decisively clearing both the handle's resistance near $317 and the original cup rim near $288.62. That breakout week's volume came in at roughly 267 million shares, above the stock's 52 week average of about 231 million, which is the kind of volume confirmation this pattern is supposed to have. From there AAPL continued higher into the autumn, trading in the $342 to $355 range as of the most recent week in this data set (closing at $342.37 the week of November 6, 2026).

Here is a clearly HYPOTHETICAL illustration of how a trader might have approached this breakout, for teaching purposes only. Buying just above the handle's resistance, around $318, with a stop loss placed below the old cup rim, around $292 (roughly an 8 percent risk on the trade), is a fairly standard, risk defined way to enter a pattern like this. For a price target, one common, old school measuring technique is to add the cup's depth (about $45, the distance from the $288.62 rim down to the $243.42 low) back on top of the breakout point, which in this hypothetical case would put a rough target near $363. As of the most recent data in this article, AAPL had not yet reached that hypothetical target. This is only meant to show how traders commonly think about entries, stops, and targets around this pattern. It is not a trade recommendation, and real position sizing and risk management involve more than three numbers on a chart.

A closer look at AAPL from March through October 2026, with weekly volume shown in the lower panel. Note the heavy volume bar during the handle's low point in late June 2026, compared with the more modest, but still above average, volume on the breakout week in mid July. The dotted lines show a hypothetical entry near $318, stop near $292, and measuring technique target near $363, included purely to illustrate how these levels are typically chosen, not as advice.

A Checklist Before You Act on This Pattern

A shape on a chart is a starting point for research, not a signal to click buy. Before treating any cup and handle as a real setup, it is worth working through a short checklist:

• Is the cup actually rounded, forming gradually over at least several weeks, rather than a sharp, narrow V shape that snapped back in a few days? A rushed recovery tends to carry less of the "shakeout and rebuild" quality that makes this pattern meaningful.
• Is the cup's depth reasonable, roughly in the 12 percent to 33 percent range off the old high, and did the stock have a genuine uptrend before the cup began? Cups that form after a long decline, rather than after a healthy advance, are a different and generally weaker situation.
• Is the handle shallow and short relative to the cup, ideally holding in the upper half of the cup's range, and does it avoid giving back most of the prior recovery?
• Does the breakout happen on volume that is clearly above the stock's recent average, not just a routine, average volume day or week?
• Do you have a predefined stop loss level and position size decided before you place the trade, not after, so that a false breakout has a known, limited cost?

Limits and Risks

No chart pattern, including this one, works every time, and anyone presenting it otherwise is not being straight with you. Cup and handle setups fail with real regularity: breakouts can reverse within days, handles can break down instead of up, and a stock can simply chop sideways and go nowhere after the "signal" fires. The AAPL example above worked out, but it also showed real warts along the way, including a handle that dipped below the cup's old high and an unusually heavy volume sell off inside that handle, both of which were reasons for caution in real time, not just footnotes to add after the fact.

This pattern is also not a stand alone trading system. Experienced chart readers generally treat it as one input among several: the health of the broader market and the stock's own sector, the company's fundamentals and news, and other technical signals, rather than a pattern to trade in isolation. Risk management matters as much as pattern recognition. A sensible stop loss, reasonable position sizing, and a willingness to accept that a meaningful share of these setups simply will not work are all part of using this tool responsibly. Treat everything in this article as education about how to read a chart, not as a signal to act on.

Try this pattern yourself on today's market. Spotting a cup and handle by scrolling through charts one at a time is slow, and most stocks never form one. The TruCharts stock screener lets you filter the entire market down to stocks that are currently forming a base or breaking out of one, the same two moments that mattered most in the AAPL example above (the quiet rounding of the cup and the high volume breakout week), so you can spend your time studying real candidates instead of hunting for them.

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Coming up next week: we will look at the head and shoulders pattern, one of the best known reversal setups in all of technical analysis, and walk through how traders associated with Thomas Bulkowski's "Encyclopedia of Chart Patterns" measure a price target directly off the chart once the pattern completes. You can find it at /blog/head-and-shoulders-patterns-how-to-measure-a-price-target-from-a-chart once it is live.

This article is for educational and informational purposes only and is not financial or investment advice. Any hypothetical trade examples, including the entry, stop, and target levels described above, are clearly labeled as hypothetical and are included solely to illustrate how these concepts are commonly applied, not as a recommendation to buy or sell any security. Past price behavior does not guarantee future results. Please consult a licensed financial advisor before making investment decisions.

How to use Support and resistance on stock charts and using these to determine when to buy and sell!

 

Support and Resistance: The Levels Every Chart Respects

If you've spent any time looking at stock charts, you've probably noticed something odd: price often seems to stop at the same spot over and over again, as if there's an invisible floor or ceiling. That's not a coincidence, and it's not magic — it's one of the oldest and most widely used concepts in technical analysis: support and resistance.

Before you reach for a more exotic indicator, support and resistance is usually the first thing worth learning to see on a chart, because almost every other tool — moving averages, RSI, candlestick patterns, you name it — gets more useful once you already know where the "important" price levels are.

The good news is that, unlike some technical indicators, support and resistance doesn't require any calculation at all. It's really just a disciplined way of describing something your eyes can already notice once you know what to look for.

What Support and Resistance Actually Are

Support is a price level where a stock has tended to stop falling and bounce back up. Think of it as a floor: every time the price drops down to that area, buyers seem to show up in enough force to push it back up. Resistance is the mirror image — a price level where a stock has tended to stop rising and turn back down, as if there's a ceiling that sellers keep defending.

Why do these levels exist at all? A few plain-language reasons show up again and again:

Round numbers often act like magnets — a stock bumping into $50 or $100 repeatedly isn't unusual, partly because many investors place buy and sell orders at tidy, memorable prices. Prior highs and lows matter because investors remember where a stock has turned before, and tend to act the same way when it gets there again — which becomes a bit self-reinforcing. And large concentrations of past buying or selling, like a heavy-volume day where a lot of shares changed hands at a particular price, tend to leave a "crowd memory" at that level: people who bought near there may be eager to sell once they're breakeven, and people who missed buying there may be eager to buy if price returns.

One of the more useful things to understand early on is that support and resistance aren't fixed forever. A resistance level that gets broken through convincingly often flips and becomes a new support level going forward — and the same thing can happen in reverse. Traders sometimes call this "role reversal," and it's one of the more reliable patterns in this corner of chart reading.

How to Actually Find These Levels on a Chart

You don't need a formula for this — you need a slightly trained eye. The simplest approach is to look at a stock's chart over several months and mark the price levels where it has turned around more than once. The more times price has reversed at roughly the same level, the more significant that level is generally considered to be.

A few other common ways traders identify these zones: drawing a trendline connecting a series of rising lows (an "uptrend line" that can act as dynamic support) or falling highs (a "downtrend line" acting as dynamic resistance); watching widely used moving averages, like the 50-day or 200-day, which many stocks seem to respect as a form of support or resistance in their own right; and looking for areas where trading volume was unusually heavy, since those zones often turn into support or resistance later.

It's worth being honest that this is part art, not pure science — two traders looking at the same chart can reasonably draw their support and resistance lines in slightly different places. That's fine. The goal isn't pinpoint precision; it's identifying general zones where the balance between buyers and sellers has shifted before.

A Worked Example: XYZ Industries

Here's a simple, fully hypothetical example to tie this together. Imagine a fictional company, XYZ Industries, trading in a well-defined range for several months. Every time the stock drifts down to around $40, buying interest picks up and it bounces — this happens three separate times over about four months, each time holding right around that $40 level. That's a textbook support zone.

At the same time, every time XYZ Industries rallies up toward $55, it stalls out and drifts back down — again, this happens multiple times. That $55 area is acting as resistance.

A trader watching this pattern might treat $40 as a reasonable area to consider buying (with a plan for what to do if it breaks below, since no level holds forever) and $55 as an area where they might take some profit or tighten a stop, anticipating the stock could stall there again.

Now suppose that, on the fourth attempt, XYZ Industries doesn't stall at $55 — it breaks through on strong volume and keeps climbing to $62. Under the "role reversal" idea mentioned earlier, that old $55 resistance level often becomes a new support level if the stock pulls back toward it later. Watching whether price holds above $55 on a future dip, instead of falling back through it, is exactly the kind of follow-up question a support-and-resistance-minded trader would ask next.

A True chart in action:

Here is a chart of IBM with support and resistance lines - you can do this using the tools on the interactive stock chart page and try it out yourself using the tools on the left hand side of the chart. 

Try it for some of the stocks you follow - breaking through resistance is called a breakout and there can be false breakouts also. Same for support - it is called a breakdown - and there can be false breakdowns also. You have to wait for follow through to see if the trend continues and use your other indicators to determine if these breakdowns and breakouts are valid. 

And at TRUCHARTS.COM you can set these levels using our ALERT feature and get an email alert when these levels are reached. Try it out.

Limits and Risks of Trading Support and Resistance

As useful as this concept is, it has real limitations worth keeping in mind.

First, support and resistance levels are zones, not laser-precise lines. Expecting a stock to bounce the instant it touches an exact price can lead to disappointment — price often overshoots a little in both directions before reversing, if it reverses at all.

Second, every support level eventually fails at some point if enough selling pressure builds up, and every resistance level eventually gives way if enough buying pressure builds up. A level holding three or four times in the past is informative, but it is not a guarantee it holds a fifth time. Treating these levels as certainties rather than probabilities is one of the more common mistakes newer traders make.

Third, because so many traders are watching the same obvious levels, there's a somewhat self-fulfilling quality to this concept — but that also means sudden news, earnings surprises, or broad market moves can blow through a well-established level with little warning, regardless of how "respected" it has been historically.

Finally, like most tools in this series, support and resistance tends to work best combined with other evidence — a bounce off support that also lines up with a bullish candlestick pattern or an oversold RSI reading carries more weight than a bounce off support alone. It's a foundational concept, not a stand-alone trading system.

Practice spotting these levels on real charts

Support and resistance is a skill you build by looking at a lot of charts. TruCharts' interactive stock charts make it easy to scroll through a stock's price history, draw your own trendlines, and see for yourself how often price respects — or breaks through — the same levels over time.

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Before acting on a bounce off support or a rejection at resistance, it's worth checking what's happening underneath the stock as a business. TruCharts' earnings and financials tools let you check a company's recent revenue, earnings, and margin trends, so a technical setup lines up with — rather than works against — the fundamental picture.

Coming up next week, we'll shift from static price levels to patterns that unfold in the candles themselves: candlestick reversal patterns every investor should recognize — many of which show up right at the support and resistance levels you just learned to spot.

This article is for educational purposes only and does not constitute financial or investment advice. Any hypothetical examples, including "XYZ Industries," are illustrative only and do not represent real securities or guaranteed outcomes. Support and resistance levels are observations about past price behavior, not predictions or guarantees of future performance. Always do your own research and consider consulting a licensed financial advisor before making investment decisions.

RSI and MACD (a good combination to use) - How to use these to see momentum trends and understanding divergences

 

Reading Momentum: Spotting Bullish and Bearish Divergence With RSI and MACD

In 1991, technical analyst Martin Pring published "Technical Analysis Explained," a book that became one of the standard references for traders trying to understand price behavior beyond simple chart patterns. One of the ideas Pring helped popularize for a generation of retail traders is divergence, the situation where a stock's price and a momentum indicator built from that price start telling two different stories. When that happens, Pring's core insight was simple: trust the indicator's warning before the price confirms it, because momentum tends to shift before price does.

Divergence is a term for a mismatch. It shows up when price makes a new high or low, but a momentum indicator, a tool that measures the speed and strength of recent price moves rather than the price level itself, fails to confirm that new extreme. Two of the most widely used momentum indicators for spotting this are the Relative Strength Index (RSI), which measures how fast and how far a stock has moved up versus down over a recent period, and the Moving Average Convergence Divergence indicator (MACD), which compares two moving averages of price to gauge whether buying or selling pressure is accelerating or fading.

This concept has stuck around for decades because it addresses a problem every trader eventually runs into: price alone does not tell you whether a move has real strength behind it or is running on fumes. A stock can keep grinding to new highs while the underlying buying pressure is quietly weakening, and divergence is one of the more reliable early warnings that a trend's momentum, not just its price, is starting to roll over. It will not catch every reversal and it is not a signal to act on alone, but once you can see it on a chart, you will start noticing it everywhere.

What Divergence Is and How to Read It

Start with the basic vocabulary. A bearish signal is one that suggests downward pressure or weakening upside momentum; a bullish signal suggests the opposite, upward pressure or weakening downside momentum. Overbought and oversold describe the extremes of an indicator's typical range, generally RSI above 70 is considered overbought (the move may be stretched) and RSI below 30 is considered oversold (the selloff may be stretched).

Bearish divergence happens when price prints a higher high (a peak above its previous peak) while the momentum indicator prints a lower high (a peak below its previous peak) over that same stretch of time. In plain terms, the stock is still climbing, but each new push upward is getting weaker under the hood. That mismatch is a caution flag, it does not mean the stock will fall immediately, but it tells you the rally's engine is losing power even as the car is still moving forward.

Bullish divergence is the mirror image: price makes a lower low while the momentum indicator makes a higher low. The stock is still falling, but the selling pressure behind each new low is getting weaker, which can be an early sign that sellers are running out of conviction.

The reason this works at all comes down to how RSI and MACD are built. Both are derived from the rate of change in price, not the price level itself. A stock can keep inching to new highs on smaller and smaller gains, which is exactly the kind of fading momentum that shows up as a flattening or declining indicator even while the price line keeps rising. RSI tends to be the more sensitive, faster signal, useful for spotting divergence early, while MACD, because it is built from two moving averages, tends to confirm a shift with a bit more lag but also a bit more reliability. Using both together, as this week's charts do, is a common way to avoid acting on a divergence signal from only one indicator.

Chart 1: TSLA daily closing price, June 10 to October 30, 2026 (top panel), with a 14 period RSI below. Between early September and October 9, TSLA's closing price pushed to three successive higher highs (the red dashed line), while RSI over that same stretch made a lower high (the red dashed line in the bottom panel). That mismatch, rising price, fading momentum, is the bearish divergence this week's lesson is built around.

A Worked Example: TSLA's September to October Divergence

This week's chart uses real, unmodified daily closing data for Tesla (TSLA) pulled directly from market data for this article. No split adjustment was required for this window because TSLA's most recent stock split took effect in August 2022, well before the June through October 2026 period shown here.

Look at the three price peaks marked on Chart 1. On September 3, 2026, TSLA closed at roughly $376.37 with RSI at about 61.8. On September 23, it closed higher at about $380.12, with RSI essentially flat at about 61.2. Then on October 9, TSLA closed at its highest point of that stretch, about $382.70, but RSI had slipped further to roughly 60.0. Each price peak was higher than the last. Each RSI peak was lower than the last. That is bearish divergence by the book: the stock kept climbing, but the momentum behind the climb was quietly fading with every new high.

Chart 2 shows the same window with MACD swapped in underneath price instead of RSI, as a second, independent check on the same signal. The MACD line told the same story: it measured about 6.42 on September 23 and only about 5.12 by October 9, a lower high even as price notched a higher one. Having two separate momentum indicators agree on the same divergence, rather than relying on just one, is exactly the kind of confirmation Pring's approach to technical analysis emphasizes.

What happened next matters as much as the divergence itself. Within a week of that October 9 high, TSLA fell to a close of about $354.72 on October 16, a decline of roughly 7.3% from the divergence high. That is the kind of follow through that makes traders pay attention to this signal in the first place, though it is worth being honest that not every divergence resolves this cleanly, more on that in the limits section below.

Here is a HYPOTHETICAL illustration only, not a recommendation and not something that actually happened in a real account. If a trader had noticed the bearish divergence forming by October 9 and sold or shorted near that day's close of about $382.70, with a stop loss placed just above the high at, say, $392 (to limit the loss if the breakout kept going instead of reversing), a decline to the $355 area by October 16 would have represented a gain of roughly 7% on the short, against a risk of roughly 2.4% if the stop had been hit instead. That is a hypothetical risk to reward setup only, real trading involves slippage, fees, and the real possibility the trade does not work.

Chart 2 also shows something just as instructive: what it looks like when a new high is NOT accompanied by divergence. By October 27, TSLA rallied to a fresh closing high of about $407.46 for this window, and this time both RSI (about 65.6) and MACD (about 6.27, moving to roughly 9.08 by October 30) also pushed to fresh highs alongside price. No divergence was present. That contrast is the real lesson: divergence is not something you see on every new high, and its absence on a strong move is itself useful information, it suggests the rally has genuine momentum behind it rather than running on fumes.

Chart 2: The same TSLA price series with MACD and its signal line below instead of RSI. The lower high in the MACD line between September 23 and October 9 confirms the divergence seen in Chart 1 on a second, independent indicator. By contrast, the October 27 high was matched by a fresh high in MACD too, showing a healthy move with no divergence warning attached.

Chart 3: With our proprietary BUY/SELL Signal algorithm and the indices all in one chart:

A Checklist Before You Act on Divergence

• Confirm the divergence on both the price chart and the indicator using actual swing highs or lows, not just a general sense that "price is up and the indicator looks lower." Mark the specific peaks or troughs you are comparing.
• Check a second momentum indicator, as this article did with RSI and MACD together, rather than relying on just one. Agreement between the two adds confidence; disagreement is a reason to wait.
• Look at the broader trend context. Divergence against a strong, well established uptrend tends to produce shallower pullbacks than divergence that shows up after a stock is already extended or near a longer term resistance level.
• Wait for price confirmation before acting, such as a break below a recent swing low (for bearish divergence) or above a recent swing high (for bullish divergence), rather than trading the divergence signal the moment you spot it.
• Decide your stop loss and position size before entering, exactly as described in the hypothetical example above, so the trade's risk is defined no matter which way it goes.

Limits and Risks

No chart pattern or indicator, including momentum divergence, works every time. Divergence can persist for weeks without resolving into an actual reversal, and a stock in a genuinely strong uptrend can show repeated minor divergences while continuing to climb regardless, a phenomenon some traders call divergence failure. Acting on every divergence signal in isolation, without confirmation from price action, volume, or the broader trend, is a common way new traders lose money chasing a reversal that never comes.

RSI and MACD are both lagging to some degree, they are calculated from past price data, so by the time a divergence is visible, some of the move may have already happened. False signals happen in both directions, and choppy or range bound markets tend to produce more unreliable divergence signals than markets in a clear trend. This concept works best as one input among several, combined with support and resistance levels, trend direction, volume, and sound risk management such as defined stop losses and reasonable position sizing, rather than as a standalone trading system. Past patterns, including the TSLA example above, are historical observations and are not a guarantee that similar setups will resolve the same way in the future.

See this week's lesson applied live on TruCharts

Reading divergence on a static chart is one thing, finding it yourself on a live chart is the real skill. TruCharts' interactive stock charts let you overlay RSI and MACD on any ticker, including TSLA, stack them beneath the price panel just like this week's examples, and scroll back through real history to practice spotting the same kind of higher high in price paired with a lower high in momentum we just walked through together.

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Coming up next week: we will look at William O'Neil's cup and handle pattern, a classic base and breakout setup from his book "How to Make Money in Stocks," and walk through how to judge whether a breakout from that base is a proper buy point or a premature one. Read it here once it is live.

This article is for educational and informational purposes only and is not financial or investment advice. Any hypothetical trade examples described above are clearly labeled as hypothetical and do not represent actual trades or guaranteed outcomes. Past price behavior, including the real TSLA data shown here, is not a guarantee of future results. Please consult a licensed financial advisor before making any investment decisions.

Another interesting indicator - ADX - Average Directional Index - Seeing if a Trend actually has strength

 

ADX Explained: How to Measure Whether a Trend Actually Has Strength

If you've spent any time looking at stock charts, you've probably noticed that some trends feel unstoppable — the price just keeps grinding higher or lower, day after day — while other "trends" are really just the price chopping sideways, faking you out in both directions. Telling these two situations apart is one of the most useful skills in chart reading, and it's exactly what the Average Directional Index, or ADX, was built to do.

ADX doesn't tell you whether a stock is going up or down. That surprises a lot of beginners the first time they hear it. Instead, ADX tells you how strong the current trend is, regardless of its direction. This matters because the same strategy that works beautifully in a strong trend — like buying dips — can lose money repeatedly in a weak, sideways market. Knowing which environment you're in first can save you from applying the wrong tool at the wrong time.

In this article, we'll break down what ADX is, how it's built from two lesser-known components, how to read it on a real chart, and where it falls short.

What Is ADX?

ADX stands for Average Directional Index. It was developed by J. Welles Wilder (the same analyst who created the RSI indicator) and is typically plotted as a single line below the price chart, moving on a scale from 0 to 100. The key thing to remember is simple: higher ADX readings mean a stronger trend, and lower ADX readings mean a weaker or non-existent trend. A commonly used rule of thumb is that readings below 20 suggest a weak or absent trend, readings above 25 suggest a trend with real strength, and readings above 40 suggest a very strong trend.

ADX is one part of a three-line family that Wilder designed together. The other two lines are called +DI (the Positive Directional Indicator) and -DI (the Negative Directional Indicator). You'll often see all three plotted in the same lower panel of a chart.

How It's Calculated (In Plain Language)

You don't need to memorize a formula to use ADX well, but understanding the intuition behind it makes the indicator far more useful.

Start with +DI and -DI. On each trading day, the indicator looks at how much of that day's price range was "up" movement versus "down" movement compared to the prior day. +DI tracks the strength of upward movement; -DI tracks the strength of downward movement. When buyers are clearly in control, +DI rises above -DI. When sellers are in control, -DI rises above +DI. A crossover between these two lines is often read as an early signal of a potential change in which side is winning.

ADX itself is then calculated from the difference between +DI and -DI, smoothed out over time (traditionally a 14-day period). Here's the intuitive part: ADX doesn't care which line is on top. It only cares how far apart they are. If +DI and -DI are close together, buyers and sellers are roughly fighting to a draw, and ADX stays low — that's a choppy, directionless market. If one of the lines pulls well ahead of the other, one side has clearly won control, and ADX rises — that's a trending market. So ADX is essentially a measure of the "gap" between buying pressure and selling pressure, averaged over time.

Try it yourself: Backtest a trend-strength rule

Reading about ADX is one thing — seeing how a rule built around it would have actually performed is another. TruCharts' backtesting tool lets you test a rule like "only take trend-following trades when ADX is above 25" against years of historical price data, so you can see for yourself whether filtering for trend strength would have improved results before you ever risk real capital.

Want articles like this one, plus new feature walkthroughs, delivered weekly? Check out our amazing screener and see how powerful it is and can be used in different combinations. Try it!

A Worked Example: ABC Corp

Let's walk through a hypothetical example using a fictional stock we'll call ABC Corp.

Suppose ABC Corp spends two months trading in a tight range between $48 and $52, bouncing back and forth with no clear direction. During this stretch, +DI and -DI are tangled close together, crossing each other repeatedly, and ADX drifts down to around 14. That low reading is the indicator confirming what the choppy price action already suggests: there's no real trend here to follow, and a trend-following strategy (like "buy when price breaks above a moving average") would likely generate a string of small, frustrating losses as the price whipsaws back and forth.

Now suppose ABC Corp breaks out above $52 on strong volume and begins a steady climb toward $70 over the following three months. As that move develops, +DI climbs well above -DI, and ADX rises from the high teens, through 25, and eventually up toward 45. That rising ADX line is telling you the trend has real conviction behind it — pullbacks within the uptrend are more likely to be temporary rather than the start of a reversal, which is exactly the kind of environment where trend-following approaches tend to perform best.

An example of ADX in action for stock NBIS: it is indicator at the bottom - it is always best never to use a single indicator to make technical decisions on trends - always use a good combination of indicators to confirm your analysis. The indicators in the chart below are my favorite go to indicators.

Practical Limits and Risks

ADX is a useful tool, but it has real limitations and should never be used in isolation.

First, ADX is a lagging indicator. Because it's calculated from an average of past price movement, it typically confirms a trend only after that trend is already underway — it won't warn you at the exact moment a new trend begins, and it can stay elevated for a while even after a strong trend starts losing steam. Second, ADX says nothing about direction. A rising ADX during a sharp decline looks identical in shape to a rising ADX during a sharp rally — you have to check +DI and -DI (or simply look at the price) to know which way the trend is pointing. Third, like most technical indicators, ADX works better on some instruments and timeframes than others, and whipsaw periods (where the market can't decide on a direction) can produce misleading readings in either direction. No indicator, including ADX, can predict the future or guarantee a profitable trade, and it's generally most useful when combined with other tools — price structure, volume, or other indicators — rather than used as a standalone signal.

Coming Up Next

Next week, we're shifting from indicators that measure momentum and trend strength to one of the most fundamental concepts in all of chart reading: support and resistance — the price levels that charts seem to respect again and again, and why that happens.

This article is for educational purposes only and does not constitute financial or investment advice. ABC Corp is a hypothetical example used for illustration only and does not represent any real company. Past performance of any indicator or strategy does not guarantee future results. Please consult a licensed financial advisor before making investment decisions.

 

When the Big Wigs say it is a BUBBLE - we should all listen

Ken Griffin and Ray Dalio along with some of the prominent hedge fund managers have been saying loudly that this is a massive bubble and now we are seeing how the AI bubble earnings is not showing up anywhere in the numbers other than the numbers for the AI labs OpenAI, Anthropic and others - there has been no productivity boom.. AI use is wide spread, but the lofty productivity gains are not materializing as much as the hype. And we have always said - when the hype ends - the money spigot will stop - even though the companies are still selling - the valuations of these stocks is at major extremes - which we have highlighted on our x.com account (@trucharts) and here in our blog. margin debt at all time highs; market valuations matching and exceeding the previous bubbles - but yet all the asses on CNBS keep hyping the tech stocks. I have lived through these bubbles and all these exponential moves always end in disaster and the ordinary guy is left holding the bag. This story has played out before - many times and every time - the dialog - 'This time is different" - will be mentioned, hundreds of times.. But you have to see through the hype and learn how to see this in the charts and what is happening actually. I use AI - it is a great tool but I do not need to use it 24 hours a day. I use it for doing research on things I am interested in, make it write code for me and it is a good TOOL - there is ZERO intelligence - even Satya Nadella said it in his interview.  

I forgot to mention - with all these companies competing for the same dollars (Google, Meta, OpenAI, Anthropic and others), it will be the race to the bottom for those revenue dollars and guess what - making profits will be a total illusion!!! 

Here are some charts showing the bubble in all its glory - (charts courtesy of  MacroMicro)

The first chart shows the margin balance relative to the money in circulation - compare today versus the 2000 bubble.

This chart shows the US total Market cap divided by the widely measure M2 money supply - above the 1999-2000 bubble..

This chart shows the Buffet indicator - highest ever!!! US market cap divided by GDP

The CEO NVIDIA (who has a bunch of 'YES MEN' ventured into making CPUs for general market - guess what he is making billions in the GPUs - but wanted to make CPUs - for which we already know the TAM (Total addressable market) by looking at INTC and AMD - there is history of the PC/laptop TAM for over 40+ years and yet he wants to make CPUs - low margin business and the stupidity of it is truly mind boggling!!! But when there is too much money - stupidity follows.

This bubble bursting is starting (started) and this will impact the Bay Area housing market and all along the West coast - which is a major bubble in itself - this happened exactly in 1999-2000. No difference - homes selling for 10M over asking!! That is a sign of a bubble..

So learn from this, and learn to read charts and read - make money but also don't get caught up in the hype - like they say on Wall Street - Bulls Make Money, Bears Make Money, Pigs get slaughtered..

Best of luck trading - I tell you charts have been my go to savior and it has truly saved me and also made money. 3 of our personal accounts were up over 25%+YTD - all from chart reading and writing covered calls. Check out our site and videos (I will be putting out some soon) and will be publishing articles here and on the site - we cannot be beat at the feature set we offer and I use it everyday to watch my stocks and charts and use it find opportunities to make money in.

Ignorance does not pay!!

Best of luck trading and investing - use trucharts.com to 

TRADE SMARTER AND INVEST BETTER!

How to Read Trend Lines and Support and Resistance Like a Technical Analyst

Long before anyone had a laptop, let alone a phone, traders were drawing lines across hand plotted price charts to figure out where a stock was likely to find buyers or sellers. The idea got its modern, widely taught treatment from John Murphy, whose book "Technical Analysis of the Financial Markets" has introduced several generations of traders to the basic toolkit of chart reading. Trend lines, along with support and resistance, sit right at the center of that toolkit, and they remain one of the first things most people learn when they start looking at charts seriously.

The appeal is simple. A trend line is just a straight line connecting a series of price points, usually swing lows in an uptrend or swing highs in a downtrend, that shows the general direction and pace of a move. Support is a price area where a stock has tended to stop falling and turn back up. Resistance is the mirror image, a price area where a stock has tended to stop rising and turn back down. None of this requires a formula, a subscription, or a computer science degree. It requires a chart and a willingness to look at it honestly.

That last part, honesty, is really the whole game, and it is why this concept is still genuinely useful more than three decades after Murphy first wrote about it. A trend line is only as good as the swing points it is drawn from, and a huge amount of bad trading comes from traders bending a line to fit what they want to see rather than what the chart is actually showing. This week we will build a real, split adjusted trend line on NVDA stock, watch it get tested, watch it actually break, and then watch it get reclaimed, all using real weekly price data rather than a tidy textbook drawing.

What a Trend Line Actually Is, and How to Read One

Start with the raw ingredients: a swing low is a week (or day, depending on your timeframe) where the price dropped and then turned back up, so that the low of that week sits below the lows of the weeks on either side of it. A swing high is the opposite, a week where the high sits above the highs around it. These turning points are the chart's own record of where buyers or sellers actually stepped in.

To draw a rising support trend line, a technical analyst looks for at least two swing lows that are both higher than the one before, then connects them with a straight line and extends that line forward into the future. The logic is that if buyers have twice shown up around a rising price level, they may show up there again. A falling resistance trend line works the same way in reverse, connecting a series of lower swing highs.

Two touches is the minimum to draw a line. Three or more touches, especially if they are spread out over weeks or months rather than clustered together, is what gives a trend line real credibility. A line drawn through two points that happen to line up by coincidence is not much more than a guess; a line that price has respected three or four separate times, across different market conditions, is telling you something about how that particular stock is being traded.

The other habit worth building early is distinguishing a wick from a close. Weekly candlestick charts show four prices for the week: the open, the close, and the high and low, usually drawn as a thin line (the "wick" or "shadow") extending above and below a thicker body. Price can dip below a trend line on a wick, meaning it traded there briefly during the week, without actually breaking the trend. What matters more to most technical analysts is where the price closed. A single week that closes back above a trend line after dipping below it on a wick is usually read as the trend line holding, or being "tested" successfully. Multiple weeks in a row closing below the line is a much stronger signal that the trend line has genuinely broken, sometimes called a "breakdown."

A Real Trend Line on NVDA, Start to Finish

Here is the whole sequence, built entirely from real weekly OHLCV data pulled this week and adjusted for NVDA's stock splits so the chart is not distorted by the mechanical price drop a split causes. The first swing low used to anchor the line sits in the week of September 5, 2025, at a low of $164.07. The second sits in the week of November 28, 2025, at a low of $169.55, higher than the first. Two points, both higher than the last, is enough to draw the line and project it forward.

The first real test came in the week of February 6, 2026. The weekly low that week was $171.03, which actually dipped slightly below where the projected trend line sat at that point ($174.12), but the week closed at $185.41, well above the line. By the "close, not wick" standard most technical analysts use, that is a trend line holding, not breaking. This is exactly the kind of moment that separates a careful trend line reader from someone who panics at the first lower wick they see.

Then, in late March 2026, something more serious happened. Over the three weeks of March 20, March 27, and April 2, 2026, NVDA closed at $172.70, $167.52, and $177.39, all below where the trend line sat during those weeks (roughly $176.86 to $177.77). Three consecutive closes below the line is a real break by almost any reasonable definition, not a wick, not a one week fluke. If you were following this trend line in real time, this is the point at which you would reasonably conclude the rising support had failed.

Except it was not over. The very next week, April 10, 2026, NVDA closed at $188.63, decisively back above the trend line, which by then sat near $178.23. The breakdown had failed to follow through, and the stock went on to make a new higher low in the week of July 2, 2026, at $189.80, still above the trend line and consistent with the original uptrend. As of the most recent close in this data set, October 23, 2026, NVDA closed at $210.96, while the same trend line, extended all the way out, sits near $191. More than a year after it was first drawn from two swing lows, the line is still technically intact, even though price broke below it on a closing basis for a few weeks along the way.

This is a genuinely useful, if slightly messy, real world lesson. Murphy's own writing on trend lines is clear that a line is a tool for organizing your thinking about a trend, not a guarantee, and that both false tests and false breaks happen regularly. The NVDA example above has both: a false test in February (the wick below, close above), and what looked like a real break in March and April that ultimately reversed. Reading a trend line well means being able to sit with that kind of ambiguity instead of forcing a clean story onto the data.

A Closer Look, With a Hypothetical Trade Example

Chart 2: A zoomed in view of the same NVDA trend line from October 2025 through July 2026, isolating the February test, the March to April break, and the April reclaim, with a hypothetical entry, stop, and target overlaid for illustration.

Zooming in on the test, break, and reclaim makes the sequence easier to see week by week. It also lets us walk through a HYPOTHETICAL way a trend line follower might have approached this setup. This is not a recommendation and not a claim about what any real trader did; it is purely an illustration of how the concept connects to a trading decision.

HYPOTHETICAL example: suppose a trader waited for confirmation rather than acting on the first dip below the line, and bought NVDA on the close of April 10, 2026 at $188.63, the week the stock reclaimed the trend line after the three week break. A reasonable, structurally based stop loss would sit below the broken low from that sequence, around $163, giving the trade room to breathe without ignoring the possibility that the breakdown was real after all. A first target might be set near the next visible resistance zone from recent chart history, around $230. Again, this entire paragraph is a hypothetical illustration built after the fact to show how the pieces fit together, not a performance claim or investment advice.

Notice what this example does and does not do. It does not try to catch the exact bottom of the dip in March, which is usually a low probability bet. It waits for the close to confirm that buyers had stepped back in, which costs some upside but avoids acting on noise. That tradeoff, giving up the first few dollars of a move in exchange for more confidence that the move is real, is one of the central judgment calls in trend line trading.

A Checklist Before You Act on a Trend Line

• Does the line actually connect at least two, and ideally three or more, real swing lows or swing highs, rather than being drawn to pass near one or two candles that do not clearly stand out as turning points?
• Are you judging a "break" by the closing price over multiple periods, not by a single wick poking through the line for a few hours or one week?
• Does the trend line agree with what the stock is doing on a higher timeframe (for example, does a weekly support line sit in roughly the same place as a monthly one), or is it only visible if you zoom in tightly?
• Have you checked whether volume increased on the move that tested or broke the line, since a break on unusually heavy volume generally carries more weight than one on a quiet week?
• Do you already know, before you act, exactly where you would be wrong, meaning a specific stop loss level, rather than deciding that after the trade is already open?

Limits and Risks

Trend lines are a useful organizing tool, not a precise predictive instrument, and it is worth being direct about that. Because they are drawn by a human (or by software following rules a human set), two careful chart readers can draw slightly different lines on the exact same chart and reach different conclusions about whether it has broken. The NVDA example above shows a trend line that was "broken" for a few weeks before resuming its climb; a trader who treated that break as final and exited or shorted the stock would have been faked out, at least for this particular stretch of 2026.

False breaks and false tests happen in both directions, and there is no setting or rule that eliminates them entirely. Trend lines also tend to work better in trending markets than in choppy, sideways ones, where price can cross back and forth over a line repeatedly without either side ever really winning. For these reasons, most experienced chart readers treat a trend line as one input among several, combining it with other forms of confirmation such as volume, momentum indicators, or the broader market environment, and they manage risk with a predefined stop rather than assuming any single line will hold. No pattern or indicator in technical analysis works every time, and trend lines are no exception.

Try it yourself on TruCharts. The interactive stock charts at trucharts.com let you draw and test your own trend lines directly on real price history, including NVDA. Pull up the same stretch of 2025 and 2026 covered in this article, add the line tool, and see for yourself where the test, the break, and the reclaim sit, before scrolling forward to see what actually happened next. It is a much better way to build the habit of reading closes instead of wicks than staring at a static image.

Subscribe to TruCharts to get next week's chart reading lesson, plus full access to the charting, screener, and back-testing tools, delivered straight to your inbox.

Coming up next week: we will look at reading momentum rather than price directly, covering how to spot bullish and bearish divergence using RSI and MACD, an idea most closely associated with Martin Pring's book "Technical Analysis Explained." Read next week's article once it is live.

This article is for educational and informational purposes only and does not constitute financial or investment advice. Any hypothetical trade examples described above are clearly labeled as hypothetical and are not a record of actual trades or guaranteed outcomes. Past price behavior, including the NVDA example used here, does not predict future results. Please consult a licensed financial advisor before making any investment decisions. 

The Interesting Fibonacci Retracement Levels for stock trading: Finding Where a Pullback Might Stop

 

Fibonacci Retracement Levels: Finding Where a Pullback Might Stop

Every stock that trends higher eventually pulls back for a bit before (hopefully) continuing on its way. The hard part isn't noticing the pullback. It's figuring out where it might stop. Buy too early and the stock could keep falling. Wait too long and you might miss the bounce entirely.

Fibonacci retracement levels are one of the most widely used tools for tackling that problem. They're a set of horizontal lines, drawn between a recent high and low on a chart, that mark the price levels where a pullback has historically had a good chance of pausing or reversing. You'll see them referenced constantly in trading commentary, chart annotations, and technical analysis write-ups, so understanding the basic idea is genuinely useful even if you never draw one yourself.

In this article, we'll explain where these levels come from, walk through a simple worked example, and talk honestly about where the tool falls short, because it absolutely does, and knowing its limits matters as much as knowing how to use it.

What Fibonacci Retracement Levels Are

The name comes from the Fibonacci sequence, a famous string of numbers (1, 1, 2, 3, 5, 8, 13, 21, and so on, where each number is the sum of the two before it) first popularized in mathematics centuries ago. Dividing numbers in that sequence by each other produces a handful of recurring ratios, most notably 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Traders noticed decades ago that prices often retrace (pull back) by roughly these percentages before resuming their prior direction, and the pattern stuck around in technical analysis ever since.

You don't need to calculate any of this by hand. A charting tool lets you click once on a recent swing low and once on a recent swing high (or vice versa for a downtrend), and it automatically draws horizontal lines across those key percentage levels between the two points. The logic in plain language is: "if this stock just rallied from $50 to $100, how far back down might it drift before buyers step back in?" The 38.2% level would sit at $80.90, the 50% level at $75, and the 61.8% level at $69.10, each one a place where traders watch for the pullback to slow down or stop.

The 50% level isn't technically part of the Fibonacci sequence at all, but it's included on virtually every retracement tool because round-number halfway points tend to act as psychological support in their own right. The 61.8% level, often called the "golden ratio," is generally considered the most significant of the group. A pullback that blows through it is often read as a sign the prior trend may be in real trouble, not just taking a breather.

A Worked Example: Hypothetical ABC Corp

Let's say shares of a hypothetical company, ABC Corp, rally from $40 to $60 over a couple of months on strong demand for its products. That's the "swing low" and "swing high" we'd anchor our retracement tool to. After the run-up, the stock starts drifting lower as early buyers take profits.

Using the $40 to $60 range, the key retracement levels would fall at:

23.6%: $55.28
38.2%: $52.36
50%: $50.00
61.8%: $47.64
78.6%: $44.28

Suppose ABC Corp's pullback stalls right around $52, finds buyers for a few sessions, and then turns back upward. A trader watching the chart would note that the stock bounced close to the 38.2% level and treat that as a sign the broader uptrend might still be intact. If instead the stock kept sliding and only found support near $47 to $48, that would line up with the 61.8% level, a deeper, more worrying pullback, but still technically within the bounds of a normal correction rather than a trend reversal. If it had kept falling straight through $44 (the 78.6% level) without pausing at any of these levels, that would be a stronger signal the original uptrend had broken down entirely.

Notice that none of this is a prediction. The levels are areas worth watching more closely, not guaranteed floors. Price can, and often does, blow right through all of them.

Here are a couple of charts from our site for the same stock on two different chart options - the first one is on our classic chart it gets plotted automatically and one for the interactive chart where you can draw these using the tools available on this page. I rarely ever use this.

Classic Chart for stock ACN:

Interactive chart tab (Stock is ACN):

The Limits and Risks of Fibonacci Retracement

Fibonacci retracement is popular, but it's worth being clear-eyed about why it works when it works, and when it doesn't.

First, there's a reasonable argument that these levels are at least partly self-fulfilling. Because so many traders watch the same 38.2%, 50%, and 61.8% lines, enough people place buy or sell orders near them that the levels can become support or resistance simply by popular belief, not because of any deeper mathematical truth about markets. That's not necessarily a reason to ignore the tool, but it's a reason not to treat it as a law of nature.

Second, retracement levels are highly subjective in practice. Two traders looking at the same chart can pick slightly different swing highs and lows, which shifts every level and can produce noticeably different conclusions. There's no single "correct" way to draw the lines, which makes the tool easier to use in hindsight than in real time.

Third, and most importantly, a retracement level is a place to pay attention, not a guaranteed turning point. Stocks frequently blow through every Fibonacci level without pausing, especially during strong trends, broad market sell-offs, or after unexpected news. Treating a 61.8% retracement as a sure-fire buy signal, on its own, is a good way to catch a falling stock with no support underneath it at all.

For these reasons, most experienced chart readers use Fibonacci levels as one input among several, often paired with volume, moving averages, or candlestick patterns at the same price area, rather than as a standalone trading signal.

See it on a real chart with TruCharts' stock screener

Reading about retracement levels is one thing; seeing which stocks are actually sitting near one right now is another. The TruCharts stock screener lets you filter the entire market down to stocks currently pulling back toward a key technical level, so instead of scanning charts one at a time you can see today's candidates for a Fibonacci-style setup in a single list.

Subscribe to TruCharts to save your screens and get a head start on next week's setups.

Coming up next in this series: we'll look at the Average Directional Index (ADX), an indicator that helps answer a different question entirely: not where a pullback might stop, but whether the trend underneath it has any real strength to begin with.

This article is for educational purposes only and does not constitute financial or investment advice. The ABC Corp example above is entirely hypothetical and is used only to illustrate how Fibonacci retracement levels are calculated. Always do your own research and consult a licensed financial advisor before making investment decisions.

 

On-Balance Volume (OBV): How Volume Confirms Whether a Stock Trend Is Real

Most new investors watch a stock's price chart and stop there. But price alone can be misleading: a stock can drift higher on a handful of quiet trades, or it can surge on a wave of heavy buying from thousands of investors. Those two moves look identical on a simple price chart, yet they mean very different things about how much conviction is really behind the move.

That's the gap On-Balance Volume (OBV) is built to fill. OBV is a technical indicator that turns daily trading volume (the number of shares that changed hands) into a single running line, so you can see at a glance whether the crowd is actually piling into a stock or whether a price move is happening on thin, unconvincing participation.

It's one of the oldest volume-based tools in technical analysis, and it remains popular precisely because it's simple to understand and quick to read. Once you know how it's built, you'll start glancing at it almost automatically whenever you check a chart.

What Is On-Balance Volume and How Is It Calculated?

On-Balance Volume was introduced by analyst Joseph Granville in his 1963 book Granville's New Key to Stock Market Profits, built on the idea that "volume precedes price" — that is, shifts in trading activity often show up before a stock's price fully reflects them.

The calculation itself is simple addition and subtraction, with no complicated formula to memorize:

• If today's closing price is higher than yesterday's close, add today's entire volume to a running total.
• If today's closing price is lower than yesterday's close, subtract today's entire volume from the running total.
• If the closing price is unchanged, the running total stays the same.

That running total is the OBV line, plotted underneath the price chart. The actual number OBV lands on doesn't mean much on its own — what matters is its direction and whether that direction agrees with the direction of price. OBV is a confirmation tool, not a standalone price target or valuation measure.

Reading OBV: Confirmation vs. Divergence

There are two patterns worth knowing, and both come from comparing the slope of the OBV line to the slope of the price line.

Confirmation happens when price and OBV move in the same direction. If a stock is making higher highs and OBV is also making higher highs, that tells you rising volume is backing the rally — more shares are being bought as the price climbs, which is generally viewed as a healthier, more sustainable trend.

Divergence happens when price and OBV disagree. If a stock pushes to a new price high but OBV fails to reach a new high alongside it, that can be a warning sign: the move is happening on comparatively weak volume, which some technical analysts interpret as distribution (existing holders quietly selling into the rally) rather than genuine new buying demand. The same idea works in reverse during a downtrend — if price keeps falling but OBV stops making new lows, it can hint that selling pressure is drying up.

A Worked Example: Hypothetical "ABC Corp"

Let's walk through five trading days for a hypothetical stock, ABC Corp, starting with an OBV of 0.

Notice that ABC Corp's price made a new high on Day 5 ($53.40, above the prior high of $52.10), and OBV also pushed to a new high (+3,100,000, above the prior peak of +1,900,000). That's confirmation: the new high in price is accompanied by heavy, consistent volume on the up days, which supports the idea that the uptrend has real demand behind it.

Now imagine an alternate version of Day 5 where ABC Corp still closes at $53.40, a new price high, but on volume of only 150,000 shares — far lighter than the volume that drove the earlier up days. OBV would rise only slightly, failing to clear its Day 3 peak by much, if at all. That mismatch — new price high, weak OBV move — is the divergence pattern worth paying attention to, since it suggests fewer shares are needed to push the price up, which can mean the rally is running out of broad participation.

Day Close Volume Price Change OBV
1 $50.00 — — 0
2 $51.20 800,000 Up +800,000
3 $52.10 1,100,000 Up +1,900,000
4 $51.80 400,000 Down +1,500,000
5 $53.40 1,600,000 Up +3,100,000

Limits and Risks to Keep in Mind

OBV is a useful lens, but it isn't a crystal ball, and no indicator — volume-based or otherwise — guarantees future results.

First, OBV only uses the closing price's direction for each day; it doesn't know how big that price move was. A stock up $0.01 on heavy volume and a stock up $5.00 on heavy volume add the same volume figure to OBV, which can occasionally overstate or understate the significance of a move.

Second, the absolute OBV number is arbitrary and depends entirely on where your chart's data starts — two charting platforms showing the same stock over different date ranges will show different OBV values. Only the shape and trend of the line matter, never the number itself.

Third, divergences can persist for a long time before anything happens, or resolve without a reversal at all. Treating a single divergence as a reliable sell signal, on its own, can lead to exiting a winning trend too early.

Finally, OBV tends to work best on stocks with consistent, meaningful trading volume. On thinly traded or highly illiquid stocks, volume swings can be erratic and produce a noisy, less reliable OBV line. As with most technical tools, OBV is generally more useful as one piece of a broader analysis — alongside price action, trend, and other indicators — than as a signal to act on by itself.

Limited-Time Launch Offer: Ends October 31, 2026

For a limited time, lock in Trucharts Standard for just $12/month or Premium for $20/month (billed annually), Premium normally lists at $468/year. You'll get full access to interactive charts, the stock and crypto screeners, backtesting, earnings and financials, dividend data, the market heatmap, and more, all in one subscription instead of paying for separate tools. Every new account also starts with a 14-day free trial.

Start your free trial and lock in the launch price before it ends on October 31.

Here is a chart showing OBV with other indicators - see if you see accumulation or distribution. And can you spot technical divergences!

See OBV in action on real charts

Reading about OBV is one thing — watching it move alongside real price history is another. With TruCharts' interactive stock charts, you can overlay On-Balance Volume (and other indicators) directly on a stock's price history to see exactly where confirmation and divergence have shown up in the past, on any stock you're researching.

Want tools like this delivered straight to your inbox along with the rest of our weekly series? Subscribe here to get new articles as soon as they're published.

Coming up next week: we'll look at Fibonacci Retracement Levels, a tool traders use to estimate where a pullback within a larger trend might find support or resistance.

This article is for educational purposes only and does not constitute financial or investment advice. The hypothetical example above (ABC Corp) uses illustrative, made-up figures and does not represent any real security. Always do your own research and consult a licensed financial advisor before making investment decisions.

The Stochastic Oscillator Explained - An amazing indicator

 

The Stochastic Oscillator Explained: Timing Reversals With Momentum

Most new investors learn to read a price chart before they learn to read what's happening underneath it. A stock can look like it's "due" for a bounce or "overheated" and due for a pullback, but gut feelings aren't a strategy. The stochastic oscillator is one of the oldest and most widely used tools for turning that gut feeling into something measurable: a simple 0-to-100 reading of how a stock's current price compares to its recent trading range.

It won't tell you the future, but it will tell you when a stock has moved far and fast enough that a short-term reversal becomes more likely. That's exactly the kind of signal traders use to time entries and exits rather than just guessing.

In this article, we'll break down what the stochastic oscillator measures, how it's built, and how to read it using a simple hypothetical example, plus the limitations every beginner should know before leaning on it.

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What Is the Stochastic Oscillator?

The stochastic oscillator is a momentum indicator (a tool that measures the speed and strength of a price move, rather than the price itself). It was developed by George Lane in the late 1950s on a simple observation: as an uptrend matures, prices tend to close nearer to the top of their recent range, and as a downtrend matures, prices tend to close nearer to the bottom of their recent range. When that stops happening, when a stock stalls well short of a new high even though price is still rising, it can be an early clue that momentum is fading.

The indicator plots on a scale from 0 to 100, displayed in its own panel below the price chart. Readings above 80 are generally considered overbought (the stock has been closing near the top of its recent range, and may be due to cool off), while readings below 20 are considered oversold (the stock has been closing near the bottom of its recent range, and may be due to bounce). "Overbought" and "oversold" don't mean a stock is about to crash or rocket. They simply describe how stretched the recent move has been relative to its own trading range.

How It's Calculated (In Plain Language)

You don't need to do this math by hand (any charting platform will plot it for you), but understanding the intuition helps you trust what you're looking at.

The core calculation, called %K, compares today's closing price to the highest and lowest prices over a recent lookback period (14 days is the traditional default). Specifically, it asks: "Where did today's close fall, as a percentage, between the lowest low and the highest high of the last 14 days?" If a stock closed right at its 14-day high, %K reads close to 100. If it closed right at its 14-day low, %K reads close to 0. If it closed exactly in the middle of that range, %K reads 50.

Because that raw number can be jumpy day to day, most charts smooth it slightly into what's called %D, essentially a short moving average of %K. The two lines are plotted together, and the interaction between them is where the real signals come from: when the faster %K line crosses above the slower %D line while both are down in oversold territory, that's often read as a potential bullish turning point. When %K crosses below %D up in overbought territory, that's often read as a potential bearish turning point.

A Worked Example: ABC Corp (Hypothetical)

Let's walk through a simplified, illustrative example using a hypothetical stock, ABC Corp (not a real company, just numbers to show the mechanics).

Suppose ABC Corp spends three weeks sliding from $64 down to $48, a steady downtrend. As it approaches $48, the stochastic oscillator's %K line has dropped below 20, reflecting that each recent close has been sitting near the bottom of its 14-day range. For a few more sessions, ABC keeps drifting lower, but %K stops making new lows along with it, flattening out around 15 even as price edges down to $47.50. That gap between price still falling and the oscillator failing to confirm it is called bullish divergence, and it's one of the more closely watched stochastic signals.

A few sessions later, ABC closes at $49, and the %K line crosses back above the %D line while both are still below 20. A trader watching this indicator might treat that crossover, combined with the earlier divergence, as a signal that selling pressure is exhausted and a short-term bounce is more likely than not. That doesn't guarantee ABC rallies from here; it simply flags a moment where the odds, based on this one indicator, have shifted.

Here is a chart showing the stochastics in action on a chart: Study it carefully with the other indicators we have highlighted earlier - you will see magic.. Try it, just think about how these work together. We offer unlimited indicators on our site.  

The Limits and Risks of the Stochastic Oscillator

No indicator is a crystal ball, and the stochastic oscillator has well-known weaknesses that every beginner should keep in mind:

It can stay "overbought" or "oversold" for a long time during strong trends. In a powerful uptrend, a stock can hang out above 80 for weeks, repeatedly "signaling" a pullback that doesn't meaningfully arrive while the price keeps climbing. Selling purely because a stock is overbought can mean exiting a winning trend far too early.

It generates false signals, especially in choppy, range-bound markets. Crossovers can flip back and forth rapidly when a stock isn't trending in either direction, producing buy and sell signals in quick succession that whipsaw a trader in and out at a loss.

It's a lagging-ish, range-based tool, not a prediction. The oscillator describes where price has recently been relative to its own range. It doesn't know about tomorrow's earnings report, a surprise news headline, or a broader market selloff that can override any technical signal entirely.

For these reasons, most experienced traders treat the stochastic oscillator as one input among several (often paired with trend-confirmation tools, support and resistance levels, or volume) rather than a standalone buy-or-sell trigger.

See It in Action: TruCharts Market Heatmap

Before you dig into any one stock's stochastic reading, it helps to know where the broader market stands. TruCharts' market heatmap gives you an at-a-glance view of which sectors are currently strong and which are weak, so you can spot where momentum (and potential oversold bounces or overbought pullbacks) may be building before you drill down into individual names.

Subscribe to TruCharts to get full access to the heatmap, interactive charts, and the rest of our research tools.

Coming Up Next

Next week, we'll look at volume and On-Balance Volume (OBV), a way to check whether the price moves you're seeing, including the kind of stochastic signals covered here, are backed by real buying and selling conviction or just thin, low-volume noise. If you want to revisit today's topic later, you can find it at /blog/stochastic-oscillator-timing-reversals-with-momentum.

This article is for educational purposes only and does not constitute financial or investment advice. "ABC Corp" is a hypothetical example used solely to illustrate how the stochastic oscillator is read; it does not represent any real company or security. No indicator, including the stochastic oscillator, guarantees future results. Please consult a licensed financial advisor before making investment decisions.