Wait to Reconcile Conflicting Charts

This column was originally published on RealMoney on Aug. 29 at 11:02 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Last week, a reader asked me how to reconcile conflicting daily and weekly charts. This swing trader, whose average trade is one to three weeks, finds weekly charts more useful for his trading methodology, but notes that the corresponding daily chart almost always conflicts with the weekly chart.

"The weekly looks good, but the daily is starting to roll over. Should I ignore the daily if I'm trading the weekly chart?"

I have a fairly straightforward answer. I'd suggest using multiple time frames for any chart analysis. Two is a minimum, and more is better. The longer time frame (here, the weekly chart) should be used for trend. Forget about how the daily chart looks for a minute.

Does the weekly chart reveal an uptrend (higher highs and lows) or a downtrend (lower highs and lows), or is it just a mess (plenty of price action, but no discernible trend)? I tend to rely on the 20-period moving average for a sense of trend. Is it heading higher or lower, or is it flatlining?

With a reliable sense of the weekly trend, I can plan my next move. If the weekly chart is in an uptrend, I'm looking to buy. That's when I look at the daily chart.

As this reader notes, it's frustrating when a weekly chart looks bullish but the daily chart shows the stock rolling over. Here's the reason the charts tend to conflict: The very thing that gives a weekly chart its bullish appearance is an uptrend in weekly bars (each consisting of five trading days).

So by the time we see an uptrend in the weekly bars, the daily chart is in a maturing uptrend. The weekly looks so attractive that you are just itching to buy -- but you can't because of the weakness in the daily chart. What do you do?

You wait. Remember the reason you use the dual time frame. Again, the weekly chart is a frame of reference for trend.

Once you have that reference point, use the daily time frame for entries and exits -- not for trend.

If the weekly chart is in an uptrend, don't buy a daily chart that is rolling over. Just watch it. Once the daily chart is firming up, you've got your entry point. You aren't chasing an uptrend; you're waiting patiently for a lower price.

If you can buy a dip in an uptrending daily chart when the corresponding weekly chart is also dipping within an uptrend, you've got a very low-risk entry.

Let's look at some charts.

Symantec

This daily chart of Symantec(SYMC) shows a stock that just can't seem to get away from $20. The $20 level acted as support in March, resistance in May and now is acting as support again. Frankly, the weekly trend is ambiguous, so any trade should be a quick one. With all the secondary indicators at their extreme lows, I'd say Symantec was due for a bounce. But I'd protect my position with a stop just beneath Friday's low.

Adobe

This weekly chart of Adobe(ADBE) shows a series of lower highs and lows. Also, the stock's 20-week moving average is trending lower. So, for my preferred trading analysis, this stock is in a downtrend. It's a short candidate. Now you take a look at the daily chart, which I haven't presented here. For a short entry, we want to see the price extended to the upside and beginning to roll over. That's where we enter, over the top of a daily uptrend within a weekly downtrend.

FX Energy

FX Energy(FXEN) has been bouncing off $9.50 for the past few months. The weekly chart (not shown) shows a mature uptrend that began last October. Even though the uptrend is long in the tooth, I'd still look to buy on any pullback to $10, the level of last week's breakout. I'd keep a stop in the mid-$9s. If the stock pulls back that far, this breakout is likely to be the latest in a series of false breakouts.

Kopin

Kopin(KOPN) looked like it had topped out at $6 in July. First, the three-month run from around $2.50 to $6 ended, but with only a slight pullback. Second, the bulls pushed Kopin up near $6, but the stock rolled over before it tested the previous high. However, Kopin broke out in early August. This breakout was an excellent sign of strong demand for the stock. After all, the stock had advanced more than 140% since mid-April, but it led to only mild profit. Third, the breakout level was promptly tested, but there was sufficient demand to hold the stock at $6. Fourth, the uptrend failed just below $7 and is rolling over a bit. With so much buying demand holding up this stock, I'd use any further weakness as an opportunity to buy some stock.

Be careful out there.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider FX Energy and Kopin to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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