When it comes to figuring out when to buy a stock, there are two main schools of thought. The first is fundamental analysis, and the second is technical analysis.
Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits, and so on—the day-to-day details of a business’ operations.
Technical analysis involves only looking at charts. A stock chart is a visual representation of the price movement (also known as price action) of a particular security over time.
Using different mathematical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns.
Fundamentals need not be at odds with technical analysis. The most successful investors often use both methods.
Fundamental analysis works best for determining what stocks to buy, assuming an investor wants a stable, reliable stock to hold for the long term.
Technical analysis can help to identify when to buy a stock. Short-term traders sometimes use technical analysis in an attempt to profit from small price movements.
Below we will look at five common bullish indicators used in technical analysis and briefly discuss how they can be used to determine a reasonable time to buy a stock or ETF—the “entry point.”
Technical Indicators of a Bull Trend
Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.
Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).
Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.).
Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.
All of these methods are broadly referred to as technical analysis—the process of using charts to try to predict which way a security will move next.
A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.
Here are five examples of bullish indicators and bullish patterns.
The Relative Strength Index is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes.
The higher the RSI, the more likely the stock is overvalued, and the lower the RSI, the more likely the stock is undervalued.
The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation, and when it rises above a certain level, it can indicate—you guessed it—overvaluation.
RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.
An RSI of 50 is considered neutral, 30 and lower is considered undervalued (bullish), and 70 and above is considered overvalued (bearish).
The lower the RSI, the more of a bullish indicator it could be.
The cup-and-handle pattern is among the most bullish patterns known to stock traders.
There are two main parts, as the name implies: a cup and a handle.
The cup is formed when a stock moves downward, then sideways, and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).
The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:
Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).
The handle should form over a period of at least five days to several weeks.
Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.
Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.
Moving Average Golden Cross
Moving averages are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.
A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information in and of themselves, sometimes key averages interacting with one another can serve as major buy or sell signals.
The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.
This indicator is known as the “golden cross,” and is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.
Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.
Bollinger Bands Width
Bollinger Bands combine a simple moving average with an additional metric—a measure of price extending one standard deviation above or below the average.
When Bollinger Bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.
While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.
For example, an investor might choose to look at Bollinger Bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger Bands were close together, that might give an investor further assurance that an upward move could be on the horizon.
The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.
The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.
A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate.
When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.
Other Technical Analysis Factors to Consider
It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.
Another concern is time frame.
These indicators and patterns need to be looked at over a sufficient amount of time to prove effective—the longer the better, in general. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.
Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge.
When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time.
This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.
If you think you’ve found the next good pick, it might be time to try SoFi Invest. Buy stocks, ETFs, and crypto with no commission fees.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
For additional disclosures related to the SoFi Invest platforms described above, please visit https://www.sofi.com/legal/.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.