How to read the monthly chart? A complete guide from basic to advanced by mastering this indicator

Many investors often struggle with timing their buy-in—staring at candlestick charts but unsure if it’s the right moment to enter. Besides analyzing fundamentals like company performance and profit margins, using technical indicators such as monthly and quarterly moving averages can significantly improve your decision-making success rate. This article will help you understand how to interpret the monthly line and how to combine these cycle indicators to rethink your investment strategy.

Why do investors focus on the monthly and quarterly lines?

Open any stock trading software, and you’ll see professional traders’ charts filled with multiple colorful lines. These are different period moving averages, with the monthly and quarterly lines being the most commonly watched.

Their core function is simple: reflect the overall cost basis of investors who bought the stock over a certain period. When the stock price is above these lines, it indicates most investors are in profit; when below, it suggests they are at a loss. This perspective helps you quickly gauge the current strength or weakness of the stock.

How to interpret the monthly line: three basic perspectives

Step 1: Understand how the moving average is calculated

The foundation of reading the monthly line is understanding how it’s generated. The calculation is straightforward—select a period, take the closing prices within that period, compute their average, and connect these averages to form the line.

For example, using NVIDIA (NVDA) data from the first half of 2024, take the closing prices of the most recent 20 trading days (roughly one month), sum them up, and divide by 20 to get a point on the monthly line. As each new day closes, the line updates and extends to the right.

Depending on the period, technical analysts typically focus on these key cycles:

• 5-day line (one week): reflects short-term momentum
• 20-day line (one month): reflects medium-term trend
• 60-day line (one quarter): indicates quarterly direction
• 120-day (half-year) and 240-day (full year) lines are used to observe long-term trends

Step 2: Observe the relationship between the stock price and the monthly line

Now that you understand the origin of the monthly line, the next step is to observe the relative position of the candlestick chart and this line.

Most optimistic scenario: The candlesticks are always above the monthly line, even above the 5-day, 20-day, and 60-day lines simultaneously. This indicates that both short-term and long-term investors are in profit. Psychologically, the selling pressure is low, and upward momentum is strong.

Most cautious scenario: The candlesticks are consistently below multiple moving averages. Most investors are at a loss, market sentiment is pessimistic, and many are trapped in positions. If the price continues to fall, the selling pressure from these losing investors will increase.

Step 3: Recognize crossover signals between the monthly and quarterly lines

When it comes to practical trading, the key is often not just the lines themselves but their interactions.

Golden Cross: When a short-term moving average (like the 5-day or 20-day) crosses above a longer-term average (like the 60-day or 120-day) from below. This indicates increasing buying momentum, most traders are turning profitable, and it’s generally seen as a bullish signal.

Death Cross: The opposite—short-term averages crossing below longer-term ones—suggests rising selling pressure and increasing losses, warning of potential trend reversals or exit points.

Using the monthly line to guide actual trading decisions

Interpreting the monthly line also involves observing the arrangement of multiple moving averages.

Bullish alignment: buy signals

When the 5-day, 20-day, 60-day, and 120-day lines are ordered from top to bottom and all are trending upward, this is a classic bullish alignment. It indicates that short, medium, and long-term trends are all pointing upward, suggesting the stock has completed a bottoming process and is about to enter an upward cycle. This is an ideal buying zone.

Bearish alignment: exit signals

Conversely, if these lines are ordered from top to bottom as 120-day, 60-day, 20-day, 5-day, and all are trending downward, it signals a bearish trend. Investors across all timeframes are in loss, and the downward momentum is strong, increasing the risk of further declines.

Consolidation and indecision: watchful waiting

Sometimes, the lines run nearly parallel, moving horizontally close together. This indicates a balance between buyers and sellers, requiring external catalysts (like earnings reports or market events) to determine the next move. Patience is advised until clearer signals emerge.

Why is the monthly line so effective? Deeper reasons

Monthly and quarterly lines are widely used because they incorporate a large amount of trader behavior data. Each point on a monthly line represents the results of thousands of trades, making it a relatively objective reflection of market sentiment rather than easily manipulated by individual actors.

Additionally, with a sufficient sample size (20 or 60 trading days), these lines effectively filter out short-term noise and technical fluctuations, revealing the true market direction.

For beginners: three limitations of monthly line analysis

1. Lagging nature

A common pitfall is the lagging characteristic of the monthly line. Since it’s based on past prices, it often reacts slowly to trend reversals. You might see a death cross only after the decline has already started, causing you to miss the optimal exit point.

2. False signals from sudden events

Major negative news (like regulatory changes) can cause a sharp short-term drop, which might trigger a false death cross on the monthly line. A sudden plunge could be just panic selling, but the line may be dragged down, leading to misjudgment and unnecessary exits.

3. Limitations of a single tool

The monthly line should never be your sole decision-making tool. Combining it with volume, volatility, fundamental changes, and overall market conditions provides a more comprehensive view.

Practical application of monthly line analysis

Establish clear rules: Don’t buy or sell based solely on one line. For example, set rules like “consider buying only when a golden cross occurs and the price breaks above the 20-day line.”

Multi-cycle confirmation: Don’t rely only on the monthly line. Observe weekly and daily charts for confirmation. Wait for multiple signals to align before acting, which greatly improves success rates.

Combine with other indicators: Use the monthly line alongside price patterns (like double bottoms, head and shoulders), volume changes, and other technical tools for multiple confirmations.

Set stop-loss points: Even if the monthly line looks promising, always set stop-loss levels to protect against unexpected market reversals.

Ultimately, interpreting the monthly line is about viewing it as a mirror reflecting the true costs and psychology of market participants, not as an absolute predictor. When combined with other analysis methods, the monthly and quarterly lines can become powerful tools in your investment decision-making arsenal.