Technical Analysis: Using Multiple Time Frames

10/01/2008 12:01 am EST

Focus: STRATEGIES

Brian Shannon, CMT

President, AlphaTrends.net

Those familiar with my articles should be able to guess that, with a title like Technical Analysis: Using Multiple Time Frames, Brian Shannon's new book fits quite well with my style of technical analysis. Brian’s self-published book does a good job of covering some of the basic tenets of technical analysis. For the person who asks either ‘What is technical analysis?’ or ‘Why technical analysis?’, they should get an answer to both questions in the first six chapters.

These initial chapters cover stage analysis, which I first encountered 30 years ago from the writings of Stan Weinstein, who was one of my early mentors. Stan was the editor for many years of the Professional Tape Reader and author of Stan Weinstein's Secrets for Profiting in Bull and Bear Markets. For those of you who are not familiar with Stan’s work, he broke the movement of stocks (and this really applies to all financial instruments) into four stages: Stage 1-The Basing Area; Stage 2 - Advancing Phase; Stage 3 - The Top Area; and Stage 4 - The Declining Phase. Brian gives Stan proper credit and names the stages as: Accumulation, Markup, Distribution, and Decline. Each of these stages is covered in their own chapter, and for the person who is starting to learn about technical analysis, these stages are a great place to start. Looking at any market in terms of a complete cycle I think can be easier for most to grasp and this perspective might also help to convince some skeptics.

Brian goes into a fair amount of detail on the various stages, including what to look for in determining a market’s change from one stage to another. For example, when one is looking for a change from Accumulation to Markup he advises looking for “higher lows, increased trading volume, more frequent tests of a key levels of resistance, and a flattening to rising action of longer term moving averages”. Color candle charts are used throughout the book, but to me the use of weekly, daily, 30-min, and 1-min charts in the same figure could be confusing to a new technician.  Additional text accompanying each figure could have alleviated any confusion. I would agree with him that stages can be identified in any time frame, but I have always felt that starting from the weekly or longer period and moving to shorter time periods is the most effective approach, even for swing traders. He delves into this in a later chapter, but differs in that he concludes that swing traders should look to the daily chart for ideas on the primary trend.

After discussing the various market stages Brian moves on to other topics including support and resistance, trends, and volume. These subjects are handled well and even though some may find parts of the discussion too simplistic, sometimes that is the best approach. In his chapter on trends he uses the phrase “from the lower left to the upper right” to describe an up trending stock. This phrase is often used by well-known analyst and fund manager Dennis Gartman when he appears in the financial media to emphasize that one should try to step back and not to get caught up in the short term market fluctuations.

Moving averages are also discussed, and Brian includes a table of what he has found to be the best moving averages for use with the various time periods, as well as how he interprets various crossovers and tests of these moving averages. In later chapters he shares his methods of when to buy and concentrates mainly on using intra-day charts. This is followed by a chapter on how and when to sell short. One of the more innovative sections is Chapter 15, entitled “The Short Squeeze”, which is particularly appropriate in today’s market. This chapter may also give the more experienced trader some food for thought as he discusses how he uses the short interest data to identify stocks that may get squeezed. He concludes with a discussion of risk management, a list of his trading tips, and how he suggests that one put it all together.  The discussion of how he approaches the trading week and each day emphasizes that a disciplined, routine approach is necessary. If you are just starting to explore the world of technical analysis, this easy-to-read book by Brian Shannon is surely a good place to start.

Related Articles on STRATEGIES