Monday, May 31, 2010

The Importance of Using Multiple Timeframes

Most Technical Analysts have a timeframe that they use to trade or invest. A day trader may use a 1 minute or 5 minute chart to capture short term nuances in a stock price fluctuation. A swing trader might use a 30 or 60 minute chart to avoid some of the extreme short term noise. Position traders might use a 1 day chart to see intermediate trends and a long term investor might like to look at weekly or monthly chart to see a stronger trend.

As each type of trader/investor ponders their own 'standard' chart there are different ideas and patterns that more visibly present themselves, sometimes masking or overwhelming other important patterns. Each timeframe gives different moving average figures and momentum indicators. Let me walk through an example using the 5 minute, 60 minute, daily, weekly and monthly charts for SPY the S&P 500 ETF.

5 minute chart

On the 5 minute chart there is support at the 109 level and the recent uptrend line. All SMAs are neutral. Points to a short term positive if trend holds.

60 minute chart

The 60 minute chart defines support at 108.78 at the 50hr SMA with further support at the bottom of previous channel. It shows resistance at 2 levels, the channel from a few days ago and the recent high of 110.76 followed by the 100hr SMA at the same level of the triple doji before the gap down. more positive then negative but in a range.

Daily chart

The daily chart reveals a test of the LT downtrend (resistance) line right at the 200 day SMA on weaker volume. More bearish than bullish until pierces the 200SMA

Weekly chart

The weekly shows a stepping down since the beginning of April and a probe of 104.75 three times, forming the base of a descending triangle. Last week was a near hammer candle though. Here a break of the downtrend or the 104.75 support defines direction.

Monthly chart

The monthly chart shows the April shooting star correctly predicted the sell off in May. Price has now tested below but held a 50% retrace of the March 09 - April 10 up move. Support now is the 50% retracement at 108.60. A very bearish candle for May.

So you can see that although in many of these different timeframes support is in a tight range, the shorter term charts arte much more bullish than the long term charts.

Putting money to work using just one chart is like driving a car and looking out the windshield but not using the rearview or side mirrors. You get a lot of information but not all of it. I am not advocating that you have 5 different timeframes running as you trade your book. But you can gain an edge by knowing at 3:00pm on Friday or an hour before the close on the last day of the month, the stock you are watching is near a critical level for that timeframe, even if it does not seem to be in the shorter timeframe that you are trading.

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