If I had used this approach, I would have sold my 100 shares at $336 in 2001 and had $33,600 to invest elsewhere. Even if I hadn’t reinvested, I would have had more money using this technique than the buy-and-hold strategy I used.

Other Applications of Support and Resistance Levels

As an aside, I have used support and resistance levels as a trading tool differently. Sometimes a stock price goes up and down between a support level and a resistance level. When I had time and money to risk, I took advantage of this pattern with two different stocks. In both cases, the stock price moved up and down within a range of $10 (e.g., between $80 and $90) several times over the course of six months. Every time the price got to the top of the range, I’d sell it. When it got to the bottom of the range, I’d buy the stock. In each case, I could buy and sell the stocks three or four times, giving me a $10 per share gain each round trip.

Bollinger Bands

The chart below shows Boeing’s stock price, including the Bollinger bands, around the large price drop in 2001.

The Bollinger bands indicated sales in late 2000, early in 2001, in late May 2001, and then again in August 2001, with buy indicators in between. Because we are focusing on the large price drop from July 21 through September 24, I’ll focus on the bands around that time period.

The Bollinger bands indicated a sell around May 31 when the price was about $42 a share, as indicated by the first orange circle. They then indicated a buy at the low on September 24. If I assume it took me 5 days to recognize that low, I would have bought the stock at about $22.

The chart below shows the corresponding information around the 2020 price decrease.

In this example, the stock price approached the Bollinger band on February 13. Again assuming it took five days to recognize this point, I would have sold the stock at about $335. Using the same logic, I would have purchased it about five days after the low price at about $130.

If I had made these trades, the $1,062 I started in 1990 would have had a value of $132,000 in early 2021. This amount is only a very rough approximation, though, as I ignored all but these two buy and sell signals.

Simple Moving Averages (SMA)

The chart below shows Boeing’s stock price, including the SMA 9 and SMA 180 lines, around the 2001 price decrease.

The SMA lines indicate a sale on June 25, 2001 (when the pink line crossed below the blue line and circled in red). If I sold the stock the next day, I would have gotten about $37.50 per share. Because the crossing of the two lines is much easier to identify, I assumed I would make the trade the next day rather than waiting five days.

The next buy signal came on February 22, 2002 (when the black line crossed above the blue line and circled in green). If I bought the stock the next day, I would have paid about $29.75 per share.

The chart below shows the corresponding information around the large price drop in 2020.

The SMA lines indicate a sale on December 9, 2019. If I sold the stock the next day, I would have gotten about $347 per share. The next buy signal came on November 9, 2020. If I bought the stock the next day, I would have paid about $185 per share.

If I had made these trades, the $1,062 I started in 1990 would have had a value of $56,000 in early 2021.

Comparison

The table below compares my gains if I had used each of four strategies for dealing with the large price drops in 2001 and 2020.

As indicated above, these estimates only focus on the two time periods during which the price dropped significantly. As such, the ending balances for the strategies other than Buy and Hold would have been different if I had followed the buy and sell indicators consistently. Nonetheless, this comparison illustrates the benefits of identifying turning points in the price of a stock.

Closing Thoughts

Knowing how to read stock charts can provide insights that might help you avoid owning a stock when the price drops significantly. That, in turn, can increase the total return on your portfolio. You might want to use stock screeners, that can help you reach charts and get insights into your trades.

However, as with any investing strategy, technical analysis can’t predict the future price or predict future price movements. Specific drawbacks to relying solely on technical analysis for your buy and sell decisions include the following.

• It would help if you looked at the stock charts frequently, at least once a day, to avoid having the stock price change dramatically before you execute your trades.
• You will likely have many more trades in your portfolio. For example, I ignored several buy and sell indicators on the SMA and Bollinger Band stock charts from 2001 and 2020, along with many more during time periods not included in these charts.
• The buy and sell indicators on your stock charts may not work in every situation. As you may recall, there was no support level after the 2001 Boeing price drop and no support or resistance level around the 2020 price decrease. And, the support-and-resistance-level approach performed worse than the buy-and-hold strategy in my comparison.
• If you hold your stocks in a taxable account, you will need to pay capital gains tax every time you sell a stock at a profit. These taxes will reduce your total return, possibly enough to offset the benefits of avoiding price decreases.
• Very few people have made money by timing the market or individual stock prices in the long term. Using technical analysis as the sole basis for your trading decisions is essentially a form of timing the market.
• Technical analysis can’t anticipate world events, such as the events of September 11, 2001, or the COVID-19 pandemic in 2020.

As such, you’ll want to consider these risks if you decide to incorporate your new knowledge of how to read stock charts into your trading strategy.