Great Example of Trading on Multiple Time Frames

01/25/2011 1:01 am EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Exxon-Mobil (XOM) has been one of the strongest performers in the Dow Jones index lately, and the rise correlates in part to the QE2 stimulus effects, giving us a great lesson in both charting breakouts and “stock-specific” narratives, or even broader market narratives.

Let’s start with the monthly chart and then drill down to the big 35% rally as seen on the daily chart:

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A brief refresher in QE2 stimulus effects: A rumor/whisper campaign began in late August/early September 2010 regarding the next stimulus package from the Federal Reserve—which would later be dubbed “QE2"—that revolved around the Fed purchasing US Treasury notes in an attempt to push yields down, thus stimulating the economy.

Many articles have been written about that concept, but the purpose of this article is to view the ripple effects on the chart of Exxon-Mobil, a stock doubly suited to benefit from the QE2 policies.

Namely, the US dollar weakened due to the stimulus, which in turn boosted prices of assets priced in dollars—oil and stocks, for example.

Perhaps not surprisingly, oil stocks stood to benefit greatly from the stimulus measures (still ongoing) as the currency weakened and stimulus/liquidity was added to a recovering economy. Oil tends to move in the same direction as stocks as both are tied in large part to the health of the US and global economies.

Let’s now turn the attention to the weekly chart of Exxon-Mobil, which broke a major falling trend line and monthly confluence exponential moving averages (EMAs) at the $65 level at the end of October/early November.

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For shorter-term traders, it’s important to keep monthly levels and price structure (trend lines, swing highs/lows) in focus to see if these long-term levels break or hold—which gives opportunity via shorter time frame positioning (depending on what happens at those levels).

Price broke through $65, which set the next intermediate price target to the December 2009 prior swing high target near the $75 level—which was hit very quickly as the breakout price move continued.

Let’s drop to see that move—and prior lower frame trend line breaks—on the weekly scale:

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OK, this chart is over-annotated, so let’s take it step by step to hit the highlights.

First, I’m just showing educational examples of how price broke intermediate trend lines—both up and down—through 2009 and 2010, and the subsequent rally or decline that continued after the breakouts.

Breakouts from trend lines like these offer trading entries with low-risk stops (above the trend line).

I’m showing these as arrows just for educational purposes in the context of a discussion of a breakout above $65 resistance.

Second, let’s focus on the main topic at hand: The QE2-driven price breakout move in XOM.

I mentioned earlier the key $65 level as both trend line and monthly EMA resistance. Notice also how $65 serves as resistance via the 50-week EMA that price broke—thus turning the tide from sellers to buyers—or from supply to demand on such a critical price breakthrough.

I like to call those “game changers” when price shatters a critical higher time frame level. Anyway, this is a good example of that concept.

What erupts is often a positive feedback loop, wherein those who are short shares of XOM must then cover, as price rallied above their key level.

Simultaneously, those sidelined buyers waiting for confirmation, or just buyers coming in from fundamental analysis (and not looking at charts at all) help drive price higher, which forces more bears to stop out, which then drives more interest in the breakout, bringing in more buyers.

Main idea here is that the breakout above the $65 level in early-November 2010 was a key game changer that set up a potential play for the $75 level (prior swing high) and ignited a positive feedback loop of buying pressure.

Here’s what it looked like on the daily chart, which brings us to where we are now:

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Look closely to see how the lower frame signaled an initial resistance breakout as October began. Price broke the August high at $62, which simultaneously broke above the 200-day simple moving average (SMA), a trigger that investors use as a yes/no decision support when adding a stock to their portfolio (generally, investors prefer to add stocks that are above the 200-day SMA).

So the daily chart had an all clear signal in early October, the weekly chart similarly gave a buy on the breakthrough of the 50-week EMA at the $62 level, and then finally all of this lower time frame bullishness culminated with a breakthrough at the $65 level—the trend line and triple EMA level on the monthly chart.

This is a great example of how to incorporate higher time frames and objective price levels into your lower time frame trading and even investing decisions.

It’s also an example of how lower time frame structure gave early clues ahead of levels breaking on higher structure. Time frames work together in creating the bigger picture of probabilities and opportunities as a price move develops.

I did want to point out one more lesson item on the daily chart. The early-November period shows a surge in price, momentum, and volume, commiserate with the key breakout of the monthly level, which likely triggered the positive feedback loop I mentioned earlier, where bears were buying shares to cover and new buyers were simply buying new shares.

Generally, when price is in a rising trend and you observe rising/stable momentum and volume, it is a strong confirmation of the trend and suggests odds favor even higher prices yet to come.

Price pulled back with the market in November and then broke above a mini-triangle pattern with a strong gap, which leads us on the monthly creep where we are today as we challenge the $75 level that was the original target on the breakthrough of $65.

We’re seeing similar momentum and volume coming into the stock at this level, so do watch closely for signs of a price breakthrough, or alternatively, a pause here.

Take a moment to learn these lessons from this stock, and know that these lessons are not specific to Exxon-Mobil, but are principles of technical analysis that are helpful in guiding trading and investing decisions in all markets and all time frames.

By Corey Rosenbloom, trader and blogger,

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