This column was originally published on RealMoney on Feb. 13 at 12:45 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Finding the trend should be an easy exercise. Just look at the chart, spot the trend and act accordingly. In theory, trading with the trend is equally easy. Just buy stocks that are moving up and sell stocks that are moving down. In practice, trend identification is a skill that many traders struggle with. Why? Because there are so darned many trends to follow.
Trend is a function of time frame; there is no single prevailing trend in the market. For example, we might see an uptrend in a monthly chart accompanied by a downtrend in the weekly chart, with a choppy sideways trend on the daily chart -- and a steep uptrend on the intraday chart. How do you make sense of this mess?
Well, it can be easier than you think. No analysis is complete without using multiple time frames. But your average holding time ultimately will bring you back to a particular time frame that you find most useful. That time frame might be a 15-minute chart for daytraders, a daily chart for multiday traders or a weekly chart for multiweek traders.
After you've determined your preferred time period, spotting the trend is easy, and it doesn't require any fancy indicators. Last week a reader reminded me of a quote from one of Jack Schwager's Market Wizards books. I don't recall the exact quote, but the gist of it was, to find the real trend of a stock, I'll stand on top of my desk and look at the chart as it lies on the floor. That works for me: Zoom out to see the big picture. The toughest part of that exercise is climbing up on the desk.
My trend-spotting method is a bit different, though the principle is the same. I squint when I look at the screen. This simple exercise limits the input and enables me to see the major theme of the chart -- and it's a lot safer than climbing up on my desk.
recently written about the energy sector. However, many energy stocks have very similar-looking charts as they pull back to test their breakout levels. As you look at the following five charts, look at the
chart, not just the last few bars. Taken as a whole, isn't the trend pretty obvious? I believe it's important to stand on the desk and look at these trends, because they are powerful answers to the bears, who tend to confuse buying opportunities with reversals.
This weekly chart of
shows a pullback to prior resistance at $24. The blue area above shows the period of lowest volatility. This volatility squeeze now appears to be a continuation setup rather than a top. I'd look for some support at current levels and then consider buying. Squint -- what do you see? I see an uptrend.
also shows an ascending right triangle: higher lows and equal highs. This triangle finally resolved to the upside,= and now is pulling back. If sufficient buyers are lurking at the breakout level, we'll see last week's decline halted soon. That's the time to act.
Do you really have to squint to see this uptrend in
? Look at similar pullbacks to the middle Bollinger Band over the past two years. This test of the $60 level is probably the latest in a series of buying opportunities.
After breaking above the September high,
is consolidating a bit. The breakout from the November/December volatility squeeze occurred on heavy volume. Watch for sufficient demand to keep Statoil above $25. Any advance is a signal to buy, with a stop in the low $20s.
This weekly chart of
shows the ongoing pullback to test $27. The stochastics have remained above the midline during the past six months, even during pullbacks. I'd look for strong demand at the breakout level to halt the decline and would protect any position with a stop just beneath support.
Be careful out there.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Edge Petroleum to be a small-cap stock. 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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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
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