One of my favorite childhood games was to lie sideways on the grass with my eyes right against the ground. From that unique point of view, I could spy on a tiny world. Blades of grass looked like tall trees, insects became vicious predators and pockets of soil rose into vast mountain ranges.
As it turns out, close-up is also a great way to study price action. No, don't drop your face into a mud puddle to read your portfolio. But you can drop down to shorter time frames and explore tiny patterns that will make or break your trading account.
We spend hours poring over charts looking for the right opportunity. But when we find something, we forget to check alignment through various time layers. This is a critical error, because market trends are relative. In other words, bull and bear trends evolve simultaneously within a single market, at different time intervals. And they all affect trade results.
Say you turn up a nice bull flag on a daily chart, and want to go long. It's quite possible the 60-minute chart of the same trading instrument will tell you to sell short. This presents a tough decision. Do you trade the bullish trend on the daily, the bearish trend on the 60-minute, or a combination of both? Because timing is everything in swing trading, don't put your neck on the chopping block unless you have a very good reason.
Multiple time dimensions generate a host of useful strategies. For example, swing traders often buy weakness on a 60-minute chart to get a better entry on a daily chart. And momentum traders often go long when all of their charts are strong and getting stronger.
But don't drive yourself crazy. You can spend hours looking for perfect alignment, but then freeze when it's time to make simple decisions. Accept that the markets are usually drawn in shades of gray, and only so many ducks will line up in a row before you need to act.
Still confused? Here are a few examples from today's watch list.
Is this a double top or a breakout?
has been on a roll for the past month. It's also benefited from the rising prices of tech stocks as a group. But PSFT may have run out of gas this week. Unfortunately, the daily chart is giving mixed signals. Will it rally, perhaps all the way to the mid-$40s? Or is it now a good short sale in an overbought market? Let's lie down in the grass and take a closer look.
The 60-minute chart shows a "2B Top" in Wednesday's trading. This common reversal occurs when a rally exceeds the last high by a few ticks, and then fails. But the pattern doesn't give a sell signal by itself. Many times, price will pull back a few points, and then take another run at the highs. So there might be a long or a short trade here, depending on what happens next.
The close-up view tells us where to find our entry signal. A simple trendline converges with a gap PeopleSoft filled earlier in the week. If price holds this support, we could see a breakout through the highs very shortly. But if support fails, odds favor a follow-through on the reversal pattern. So we'll sit and wait until the 60-minute chart rings the trading bell.
Oxford Health Plan
daily chart is an odd-looking bird. It shows two long hammer candlesticks after a gap up on good earnings. Price is now caught between the immovable object of the down trendline and the irresistible force of the gap support. Tension like this often resolves itself into a big price thrust. But when will that happen?
The 60-minute chart tells us to get ready now. The intraday bars of the last two trading days draw a bullish pattern that looks close to breaking out. Price sits right at the top of congestion, and all three short-term moving averages have joined together. This is often a precursor for an impending move.
Alan Farley is a professional trader and author of
The Master Swing Trader. Farley also runs a Web site called
HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley held no positions in any of the stocks mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to
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