Editors' pick: Originally published March 11.
Take a look at this huge chart below. It's going to look very noisy and overwhelming -- but it's actually a really simple analysis, if you look at in bite size pieces. Let me explain this chart and you will start to see the power that technical analysis provides and how you can use it to trade stocks.
ES 24hr Trading -- 240 Minute Chart
This is the chart on the top-left. This 24-hour moving chart gives you the ultimate view of the current stock market trend and overbought and oversold levels. I use simple moving averages to gauge trends and how far price is from a mean average price; and this gives a visual of how far the market is overbought or oversold.
Also, I use these moving averages as possible support and resistance levels to add confirmation when other indicators confirm at the same price and time.
At the bottom of this 24-hour chart, you will see my custom panic selling volume indicator. When this spikes, I know traders and investors are fearful and panicking out of positions. That is when I start looking for bottoms, because I want to take the other side of these emotional trades placed by the masses.
SPY Daily Chart
Top-right. The daily chart of regular trading hours has many different characteristics from the 240 intra-day chart. Where the 24-hour chart above shows all price action, the SPY Daily chart only shows 1/3 of the days price (9:30 a.m. to 4:00 p.m. Eastern Time). This is when most of the day's volume is traded, and I like to see how the masses and "average Joe" traders perceive the market.
I use these time frames just for my cycle analysis, which allows me to identify the market trend and direction (pink cycle line) so I can identify short-term noise or counter-trend moves within that uptrend, using the shorter cycle analysis (blue line).
Both of these cycle lines use a combination of the most active cycles in the market across multiple time frames and then are blended and weighted into one line. This tells me where the market is most likely to move and when it should be struggling or reversing.
In fact, I saw the pullback coming in stocks and shorted the market for a quick counter trend trade, and exited it Thursday morning, and then go long again and this new SSO long S&P 500 trade is already up 3% within a few hours.
ES Regular Hours 9:30 a.m. to 4:00 p.m.: 30 Minute Chart
This is one of the trading signal systems that I am building which will identify these market conditions and will eventually autotrade them. This is my newest improvement and is still a work in progress, but I expect it will replace some of my other systems later this summer. My focus is to have something like this trade futures and the S&P 500 ETFs.
With hundreds of indicators and time-frames to view the market, 99% of them are lagging indicators and just duplicates of the same useless information. You only need a handful of tools to analyze the market. When they are all inline, then you have a screaming buy, sell, or profit-taking level in the market.
All these core indicators and tools are explained in detail in a book called Technical Trading Mastery - 7 Steps to Win with Logic.
If you want to know with a high degree of accuracy where the market is headed each day, week and over the next month and be able to spot extreme overbought and oversold levels to enter, short, or take profits and tighten protective stops take a look at my video newsletter and trade alert service at www.TheGoldAndOilGuy.com.
I should also mention that on May 11, I will be teaching this in detail at the Oakville Canadian Society of Technical Analysts (CSTA) event. Anyone can attend; it's free if you're a first-time guest.
This article is commentary by an independent contributor. Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.