Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Updated Post on IBM Shows Why Multiple Time Frame Analysis Is Critical
08/26/2009 12:01 am EST
In early July, I analyzed IBM's daily and weekly structure because there were clearly conflicting signals depending on whether you examined the weekly or daily time frame. Please reference the original article, "Weekly and Daily Conflicting Opportunities in IBM" for the background before reading the resolution.
The main idea was that if you examined the daily chart in isolation, you would have seen a negative divergence along with a breakdown of moving average support and the likely expectation for a major trend reversal down to be the dominant trading idea-bias short.
However, if you took a moment to look upwards at the weekly chart, you most likely were met with an opposing bias: That of the market rallying sharply and pulling back into a confluence support zone coming in from the intersection of the 20- and 50-week EMA along with the 50% Fibonacci price level, which gave an excellent low-risk buy opportunity-bias long.
So which viewpoint won? As you can see from the updated charts, I captured the prior charts on July 7th at the opportune time.
The higher time frame weekly chart, suggesting confluence support, gave the complete picture as price did find support at the confluence level at the $100 price (which also served as "round number" or "psychological" support) and we had a very strong momentum move up that has taken price currently to the $120 level.
Let's see this on the weekly chart:
There was also an ascending trend line (not shown) drawn off the November 2008 lows that served as another point of support at the $100 level.
There was the possibility that price would have formed a bear flag, but that pattern only would have triggered with a price break beneath the lower trend line should price have failed at the confluence support zone. This pattern did not complete or trigger an entry.
Instead, confluence support held via the 20- and 50-week EMAs, 50% Fibonacci retracement (just shy of $100), and the rising trend line.
The support was so strong and convincing that a large momentum move rose off this level.
Now let's take a look and see what happened on the daily chart for all the traders who took a short-sale entry from the breakdown in price structure on that time frame:
The section to highlight is the July 2009 period when price broke down beneath the rising 20- and 50-day EMAs after forming a momentum divergence into the $110 highs of June 2009.
A short-sale signal was triggered as price broke down with a stop-loss above $105, but it would have been a better idea to take a look at the weekly chart to make sure the higher time frame supported this short-sale signal. As we saw above, it did not.
The proper short sale would have been taken when price broke all the above support levels and triggered the bear flag pattern as mentioned above. It did none of these things on the weekly time frame.
Instead, a person looking only at the weekly time frame would have seen a low-risk, high-reward buying opportunity with a stop beneath $100 (or as low as $95 to ensure safety).
The lesson learned is that we need to look at a higher time frame to make sure the structure is favorable for our entry on a lower timeframe, particularly to check if the downward move on the daily chart was nothing more than a simple pullback retracement into confluence support on a weekly chart.
Using multiple time frames-even just one higher timeframe-can add additional insights that would be missed by using singular time frames.
By Corey Rosenbloom of AfraidToTrade.com
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