How A New Perspective Can Put More Money In
Your Pocket
The Dynamic Wealth Report
October 30, 2009
by Corey Williams, Editor
If you follow the stock market on a regular basis, you know the
daily swings can be quite dramatic. Just look at what the Dow did on
Monday of this week. It rallied 100 points before reversing course and
finishing the day down 100 points.
The problem is the cable news stations overanalyze the daily swings and
single events. The noise can be enough to make your head spin. I guess
they have a lot of air time to fill. (Luckily the mute button is just
a click away!)
As you know, I use technical analysis to trade. The noise I’m concerned
about doesn’t come from the TV. It’s the price and volume fluctuations
confusing interpretations of the market’s direction.
The good news is there’s an easy way to cut through the noise. I’ll tell
you exactly what it is in a minute…
As I’ve discussed before, technical analysis is a great tool to
analyze the markets sentiment about fundamentals. The noise can give you
conflicting feedback not accurately reflecting market sentiment.
That’s why the right perspective can make all the difference in the
world.
The perspective I’m talking about is the time frame you use when you’re
analyzing charts. Any good charting software, or even brokerage website,
will give you the option to view the same chart over different time
frames.
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The ones I use most are the hourly, daily, weekly, and monthly.
As a general rule, the shorter the time frame, the more difficult it is to
separate the meaningful market moves from the noise. That’s why it’s
important to view a stock or ETF from multiple time frames for
confirmation. Amazingly, many new traders fail to do this.
The best possible trade setups will show confirmation across all the
time frames.
But what does confirmation across multiple time frames look like?
To be honest, it can show up in numerous ways.
For example, a trade setup can be showing support of the uptrend on the
hourly chart, nearing a support level on the daily chart, and above the
uptrend on the weekly chart.
Take a look at this daily chart of the SPDR S&P 500 ETF (SPY). You’ll
see it’s pulled back to support of the 50-day moving average on October
28th. Then it bounced off support on the 29th. A nice trade setup
for a long position.
To confirm the setup on a longer time frame, take a look at SPY’s monthly
chart. The monthly chart drowns out all of the noise. You’re able to
clearly see the series of higher highs and higher lows are still intact.
SPY is clearly still in an uptrend.
When long time frames confirm short time frames, you’re able to drown out
the noise. And this confirmation tilts the odds of a successful trade in
your favor. When I see a trade setup confirmed across every time frame,
I’ll use a trailing stop to let this trade run as long as possible.
Now, you won’t always get confirmation of a good trade setup across
different time frames. A daily chart can look bullish while the longer
term weekly and monthly charts look bearish. When this happens, it’s
important to remember…
The longer time frame has a bigger influence than
the shorter one.
So the monthly chart has more influence than the weekly chart. And the
weekly chart has more weight than the daily chart…
If the longer time frame doesn’t confirm a setup, it doesn’t mean to ax
the trade completely. It means you should look to take profits sooner. A
good price target to take profits is a resistance level on the longer
term chart.
So remember to view your trade setups across multiple time frames. You’ll cut through the noise and find trade setups with a greater
probability of success.
• Toll Brothers (TOL) was upgraded by Citigroup
this week. They now have a buy rating on the stock. Housing prices
continue to climb according to the Case-Shiller home price index. Has
the real estate market finally hit bottom?
• Syntel (SYNT) was downgraded to hold by Deutsche
Securities. Management said they expect margins to come under pressure
from currency headwinds.
• GARP Research started coverage on Arbitron (ARB) this
week with a buy rating. The media and marketing information services
company expects 2009 EPS to grow by 3% to 14%.
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