Using reference points from monthly charts, traders can identify more effective stop levels and stay with major trend moves much longer, thus increasing their profits.
In over 30 years of looking at charts of stock and commodity market indices, I have often been struck in hindsight by the lengthy trending periods that are evident in some markets. Over the years, I have sought to improve not only in identifying the market turns, but also improving my ability to catch larger portions of these trends.
From my own experience and the observations of others, there seems to be a familiar pattern. An investor or trader will often catch the start of a good market trend and may capture most of the first major market swing. However, once the market has a significant correction, they will often lose interest or move on to another market. Therefore, they will often miss the next major part of the trend, which is often even larger than the first.
I have had the most success in identifying the major market trends by using monthly charts and technical studies. The monthly on-balance volume (OBV) for gold completed its bottom in 2002 and has stayed positive for the past ten years. The writing of my regular monthly column on the Dow stocks has further reinforced the importance of not only the monthly patterns, but also the monthly price ranges.
In my opinion, a poor entry price causes the most damage to an account, and that is why I strongly emphasize calculating the risk on every position. The combination of tight monthly ranges, monthly chart formations, and monthly OBV has helped me to identify some good recent opportunities.
MSFT traded in about a $4 range for the last five months of 2011 with the low of $23.79 coming in August. The stock closed at $25.96 on December 31, 2011, then gapped higher to start off 2012, opening at $26.55. It closed January at $29.53 and made a high in April of $32.95.
The Coca Cola Co. (KO) also was locked in a tight range from December 2011 through February 2012. The December 2011 low was $65.88 and the high in January was $70.71. The range in February was even tighter ($67.42 to $69.98), but KO then surged in March to close near the highs at $74.10. For both MSFT and KO, the initial stops were placed beneath monthly lows.
So how can monthly charts be used by both investors and traders? One approach I have been examining is to use the prior month’s high or low as a stop level. Long positions would be favored based on bullish signals from the OBV, and stops would be based on the prior month’s low.