Stock charts are often characterized (and dismissed) as great predictive tools. They are supposed to tell us which stocks will be big winners and which will be duds. Too often they do a poor job of predicting the future and that allows some folks to deem them to be of little value.
While charts can be quite helpful in stock selection, they are far more valuable as a tool for trade and portfolio management. Charts create a convenient and logical framework that can be used to manage your profits, losses, and risk. The value of charts has nothing to do with their predictive abilities. They simply help to ensure that we are using a form of discipline to control risk and contain losses.
Fundamentalists that rely solely on things like 'intrinsic value' to determine whether they buy or sell a stock have no inherent form of risk management. As long as a stock is 'cheap' then it is still worth buying or holding. That may turn out to be correct in the long run but the losses can be tremendous if the valuation calculations prove to be incorrect. If 'intrinsic value' was easy to determine and was efficiently priced by the market then it would not hold much risk but that is not the case.
In the current market environment, many market players are wondering when they should sell and claim some sizable profits. There are hundreds of strategists and experts that are happy to provide insight into all the factors that will determine where the market is heading but none of them knows for sure what might happen.
As traders and investors our goal is to maximize gains and that means staying with an uptrend as long as possible and selling as quickly as possible when the trend has come to an end. That is overly simplistic but it is the framework that we should use to determine what to do and charts are the only way to determine trends.
The first step that we need to take in using charts as a selling tool is to forget their predictive value. Forget overbought and resistance levels. Don't look at a chart and wonder how much longer it can continue higher. Embrace the fact of the chart as it stands right now and then start to look for price action that would cause a major change in the character of that chart. What does the chart have to do in order for you to believe that the trend may be shifting?
The answer to that question will vary quite a bit depending on time frames, style, and other considerations. At what point does the chart shift enough to make you think that a change is occurring?
The problem for most investors is that they don't want to overact. They don't want to be shaken out of a good position due to irrelevant volatility. That is a good goal but you can't use that goal to neglect drawing a bright red line that will trigger a sale regardless of other factors.
The vast majority of market participants that suffer huge losses in a market downturn are victims of inertia. They are like a deer frozen in the headlights of onrushing vehicles. They are trapped by indecision and then they convince themselves to continue to do little because it is now too late.
One of the best ways to overcome inertia is to keep in mind something that I write very often - you can always rebuy. Selling is just a strategic tool and a form of insurance. It can be undone quite quickly and often with little cost.
Draw bright red lines on those charts at the points that will convince you that something significant has changed. Update those charts every day and stay very vigilant. That is how you can effectively time the stock market. Let the charts be your guide and your framework. It doesn't have the great intellectual appeal of analyzing economic news or fundamentals but it will help you capture the highest amount of gains possible.