An alternative way to apply the same concept would be to use the monthly pivot levels instead of the monthly high or low. If the OBV or other technical measures were positive, then a stop would be used half of one percent below the monthly pivot. Conversely, on short positions, a stop one half of one percent above the monthly pivot would be used.
This weekly chart of Apple, Inc. (AAPL) shows the powerful recent rally, which clearly qualifies as a trending move. The week before Christmas, AAPL closed at $403.33, which was well above the prior five-week highs. The first week in January, AAPL closed at $422.40, which was above both the November and December 2011 highs.
The monthly pivot for January was $397.26, and half of one percent below that would have been $395.27.
Over the past four months, AAPL has only come close to its monthly pivot once (in early March) when it made a low of $516.22. The monthly pivot was at $514.68, so the adjusted stop based on this pivot would be $512.10. For April, the pivot is at $579.07, so an adjusted stop at $576.17 could be used. Apple has not made a lower monthly low since October 2011.
For a good example of how this might be applied in a downtrending market, we can take a look at NetFlix, Inc. (NFLX), which had an historic decline in the second half of 2011.
By the end of July 2011, the monthly pivot for July at $260.17 had been broken. On short positions, the August pivot stood at $274.08, so a stop at $275.48 (half of one percentage point above) could have been used for a stop.
In September, the monthly pivot was $235.95 (adjusted to $237.12), which was just barely exceeded on the first day of September when the high was $238.50. Of course, NFLX continued to plunge, hitting a low in early December of $62.37.
NFLX stayed below its monthly pivot after September 1 and up to December 12, when the monthly pivot stop at $73.95 ($73.58) was exceeded.
If instead using monthly highs for NFLX, the short position would not have been stopped out until January 4, when the stop based on December’s monthly high of $77.97 was exceeded.
So how can you apply this monthly analysis to your trading or investing? I hope most of you keep a written record, or journal, of your market analysis. I think it will definitely pay off in the long run.
Each month, this record should include the month’s high and low for each of the markets you are following. Every month, compare the new numbers with the prior month’s ranges. This should be done not only for markets in which you are already invested, but also for those you are watching.
For XLP, the March low was $32.87, and for XLV, it was $35.68. Therefore, these are the levels that I am now watching, and if prices drop to these levels, I will be looking at these ETFs more closely to determine potential buy opportunities.