Thursday Evening 17 December 2009
Not too many look at longer term charts, but they can be very helpful in
putting a market into a context, a very important step in order to determine
a trading strategy and knowing the trend(s) of a market. It should be known
that the larger time frame charts are more controlling than the smaller time
frames, by virtue of the fact that it takes more time to turn the trend of a
larger time period. Some of the larger time frames are not for trading, but
they are well known and used by smart money.
Starting with the Annual chart of the S & P, when price closes at, or near
the high of the bar, it most always indicates a higher high for the next time
frame, in this instance, 2010. Most always, but not always...something to
bear in mind. The Annual chart suggests a higher high for 2010. Next is
Somewhat similar to the Annual chart, the Semi-Annual also suggests a
higher high for the next semi-annual time frame, which is also 2010. Now
we go to the Quarterly chart.
Here, the story begins to take a slightly different turn. As of two weeks
prior to the end of the year for all but the weekly and daily charts, this one
also is near the high of the year-ending 4th Quarter, but note the smaller
size of the range. After 3 months of effort, the range has been unable to
extend itself higher. A smaller range is indicative of sellers meeting the
efforts of buyers, in an up move as this one, and this is why the range is
not extending to higher ground. One could reasonably expect a new high
for the 1st Q of 2010, but there is a caveat attached to the expectation.
We noted how volume has been declining steadily in each quarter...not a
positive sign. What about the monthly?
Oh, my! What a small bar, so far, [and recognition is given that trading is
only half way through the month of December, but holidays will curtail some
trading]. The monthly chart reads more like a red flag for this time frame.
Price is in the 9th month of a "political" rally, [hard to pass that line up], yet,
instead of showing strength, we see a sign of weakness. The very small
range, in fact the smallest of the entire move, is warning us that buyers are
tired, spent, unable to move price higher.
This small range is a warning that the trend has weakened...not ended, but
showing a sign of trouble.
The weekly chart tells a totally different story than the larger time frames,
altogether. Friday ends the week, so we do not yet know how it will close,
but the point is to show how viewing the market from different times frames
can put it into a context not otherwise apparent. Here, the bars at the high
of the rally are small, and we just explained what smaller bars signify in an
up trend. This last bar is on the low of the range, [so far], and this tells us
that sellers are in control of the price action for the week.
Based on the current information, we could expect lower prices on Friday,
and if they prevail, the weekly chart is telling us that time frame trend is in
Contrary to the higher time frame charts that suggest a new high for next
year, [at least for January], the daily chart has been in a trading range for
the past two months, and based on the last bar, [Thursday], the close just
erased the week's effort to go higher. You can see how small the ranges
are for the bars near the highs, forming resistance, compared to the last bar,
which is wider to the downside, and it had higher volume than the previous
five bars. A wider range on increased volume with price going lower shows
ease of movement and sellers in total control.
The high of this week is lower than the high of last week. If price continues
lower, the daily chart will have a lower swing high and a lower low, and that
will certainly change this trend from sideways to down.
What is so interesting about this exercise is that the smaller time frames are
sending a signal that is a shot across the bow for the higher time frames. A
change in trend always starts with the smaller time frames and works its way
up to a change in the higher time frames. We could be looking at a domino
effect in the making.
However, as we stated from the outset, the higher time frames are more
controlling, and if that holds true, the higher time frames are saying that this
potential breakdown in the trend structure in the lower time frames may not
have legs, and we could see a turnaround by year end.
We also said that one cannot really trade the higher time frames, so we
have to stick to the present tense activity which appears on the daily chart,
with an eye to the weekly and monthly. The daily chart says a trend change
is a growing probability.
The small range of the weekly chart does not present a counter-argument,
and almost supports what the daily chart is indicating. The small range
monthly chart supports what the weekly and daily charts are showing...a sort
of nestling effect, like Russian nesting dolls where one fits inside another.
Not shown, but the intr day trends are down, acting as a drag on the daily,
and so far, succeeding. If the daily turns, it acts as a drag on an already
weakened weekly, then the monthly ...the domino effect we referenced in
the title of this article.
This shoud give you an idea of how important it is to know ALL time frames,
to put the price activity into a context and better know what to expect from
the next higher time frame. They are all inter-related.
Let us now watch to see which time frame is going to have the greatest
impact on the other. For now, the S&P looks lower.