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Monday, April 04, 2005
Market Recap
Oil prices reached record highs again today and traded at $58.25 a barrel before the stock market opened. This caused stocks to open lower but as the day went on, oil prices settled back below $58 a barrel and stocks started to gain ground as oil sold off. The DOW finished the day up 16 points after falling to a low of 10356. This drop was well below its 200 SMA and as I mentioned last night, the DOW moved below its 200 SMA this week. It did not take long as it moved below it Monday morning but as you know by now, the intra day lows do not bother me at all. It is the closing price that counts and today the DOW did not close below its 200 SMA so today's early move does not count. In fact, the way the DOW reversed and gained ground after falling below the 200 was rather impressive.
The stock market is not out of the woods yet. Charts of the indices still need a lot of work to regain a bullish tone. The NASDAQ gained 6 points today but closed 1 point below its 200 SMA. The S&P gained 3 points today but its chart is forming a bearish flag which signals lower prices ahead. Earnings season gets underway this week and these earnings, good or bad, will likely be the item that decides which direction the market takes. I would not want to be long any stocks that remotely disappoint the street.
Indicators for Different Markets
In past commentaries, I have talked about the different indicators that I use in my trading and what indicators work best in the different types of markets. For instance, in trending markets, markets going up or down, trend lines and moving averages are excellent indicators to watch for entering trades. These indicators however, do not work well in flat or sideways trending markets. In a flat market, markets not trending up or down, it is better to use indicators such as the RSI or stochastics. These indicators will help you in timing your entry's and exits, based on overbought and oversold conditions. You will use these indicators when determining a possible reversal in the stocks direction. For example, I used these indicators when I posted a possible reversal in APA, BHP and CCJ on Thursday morning before the bell in my day trade watch list message. Those stocks were up big on Thursday and Friday. Tonight, instead of discussing indicators, I want to discuss the concept of multiple time frame charts and how to use them when trading.
Multiple Time Frame Charts
I have mentioned many times before that if you are a long term investor or longer term trader, you should be looking at charts with weekly time frames only because the daily fluctuation in price should not matter. If you are a day trader, obviously the weekly chart cannot help you at all. Most day traders, including myself, will use a 5 minute chart to enter and exit trades but this is not the only time frame I will use. I usually confirm my trades by reviewing the next major time frame chart, and for me that is the 60 minute chart. The daily chart is what I use to first get the stock on my watch list. Once I have determined the trend of the stock is up or down based on the daily chart, I will use the 60 minute and 5 minute charts to confirm and decide on an entry price.
One Chart is Only Part of the Puzzle
Trying to day trade using just one time frame chart is like a pitcher in baseball trying to pitch with only a fast ball. The batter has the advantage if he knows that the ball will be coming at the same speed on every pitch, severely handicapping the pitcher. A pitcher that can change speeds has the advantage. By looking at multiple time frame charts, you have the whole picture, not just one piece of the puzzle. After I find charts that are trending on the daily chart, I then look at the 60 minute chart. This is where you can find the stocks that are ready to make the explosive 3 day moves. Once you have a pattern you like on the 60 minute chart, you can then go to the 5 minute chart to time your entry. You enter using the 5 minute chart because there will be times when on the 60 minute chart, the stock looks great but on the 5 minute chart, it could be overextended and due for a pullback. You can get a better entry price by waiting for that pullback on the 5 minute chart that you would never see on the 60 minute chart.
Higher Time Frame Chart Carries the Most Weight
Always trade in the direction of the higher time frame charts trend. To clarify, if the daily and 60 minute chart is in an uptrend, do not short a stock that is overextended on the 5 minute chart. Simply wait for the pullback and then enter a long position at the trend line or support levels. Also, what looks like a bear flag and a great short entry on a 5 minute chart could just be a pullback to support on a 60 minute chart and the stock could be ready to make another move up. This is why looking at the higher level time frame is the best way to confirm your entries.
Shorter Time Frame Charts for Quick Exits
When trying to exit a trade with a profit, looking too far up in time frames can cost you profits. A 60 minute chart may show an overbought condition with volume decreasing, a signal that the move may be stalling out. It will take you too long to see this on a daily chart and, as a result, your profits may slip away while you wait for a sell signal on the daily. Stops should be entered based on the higher time frame chart because the trend is clearer. The 5 minute chart is too erratic to try and place a stop. If you do, the likelihood of you getting shaken out is very good. Keep in mind that your stop will be looser if you use the daily chart then it would be on a 5 minute chart, meaning more of a loss if it is taken out but with a lot less chance of getting whipsawed.
MA Crossover Trading
The moving average is a good directional indicator of momentum. I use it on the 5 minute chart when I am day trading. For example, on a daily and 60 minute charts, if I see that the 9 EMA is above the 20 EMA, I know that the momentum is up. I will then look for a EMA crossover on the 5 minute chart. Once I have a positive cross over, I enter my trade because I will have conformation from the higher time frames that I am trading in the right direction. The signal to exit the trade would be a crossover to the downside on the 5 minute chart. I would then wait for another crossover to the upside on the 5 minute chart to re-enter. I do this as many times as I can, knowing that the crossover on the higher level charts has confirmed the direction of my trade should be long. Once there is a negative crossover on the higher time frame chart, I am finished trading on the long side in that particular stock.
Scalpers and 1 Minute charts
Scalping is simply trading an enormous amount of shares over and over for just a couple of penny moves. Scalpers prefer to use 1 minute charts because they are flipping the same stock many times in one day. I do not do this often but have done it on occasion. I am not a scalper unless it is an otherwise boring day when I cannot find anything else to trade but I still feel like trading. I will only scalp one stock and that is SIRI because it is extremely liquid and I can always enter and exit easily. With SIRI as liquid as it is, it is a very good stock to scalp.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
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