The Importance of Viewing Multiple Time Frames

05/09/2013 9:00 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

What looks like a “can't-miss” trading opportunity on one timeframe may be an equally compelling “can't-miss” opportunity on a higher timeframe, but in the exact opposite direction, writes Corey Rosenbloom of AfraidtoTrade.com<http://www.afraidtotrade.com/>.

In other words, what looks like a grand breakdown opportunity on a daily chart may be a high probability bull-flag retracement set-up into support on the weekly timeframe.

That's exactly what happened in April with Google's chart, so let's take a quick moment to look at this situation review the importance of using more than one timeframe for our trading decisions, if only for a filter.

Here's the daily chart of Google (GOOG) as it developed a breakdown short-sell opportunity on April 18:

chart
Click to Enlarge

After a persistent uptrend that began with the November low, a natural pullback or retracement developed through March and April.

Generally, the dividing line between a retracement (pro-trend) expectation and a reversal (trend reversal) outcome is how price behaves relative to trendlines and rising moving averages.

For example, the breakdown and volume spike into April suggested Google (GOOG) shares were headed for a logical reversal instead of a pro-trend retracement like that, which occurred in January.

Aggressive traders would be entering short-sell/breakdown orders to profit from an expected price slide to the downside. They would also locate their stops at various levels above $770, $790, and even $800.

This would be the correct or logical assumption given the facts as they developed on the daily chart timeframe.

chart
Click to Enlarge

Pretend for a moment we didn't see the daily chart above and we're a swing or position trader who likes to buy pro-trend retracements to key support/inflection areas.

We would likely see the chart above as a grand buying opportunity, or at least a low-risk opportunity to play a possible inflection up off the rising 20-week EMA and prior high (polarity) with a target movement at least to the prior swing high near $840. Logically, our stop-losses would be located under $765, $760, or lower.

Viewing the weekly chart, there is nothing at all (with the exception of the negative momentum divergence) that suggests a reversal or bearish expectation, at least while price remains above the critical $760 inflection level.

The main idea is that daily chart short-sellers would have benefited from the extra information-and opposite perspective-provided by the weekly chart.

It would change their set-up from automatically short-selling the valid daily chart breakdown instead to wait for a confirmation trigger-and thus breakdown signal-provided by the breakdown under $766 and $760 on the weekly chart.

 

NEXT PAGE: Key Things to Watch

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Note the highlighted green/red box over the prices. This is how I tend to view “if/then” outcomes in terms of price movement off a key inflection level.

If weekly buyers step-in to overcome daily sellers into the $766 inflection level, then price will rally higher potentially to target or exceed the prior swing high into $840 in a pro-trend impulse.

However, if weekly buyers do not step in and instead selling pressure continues to break price under the $766 key support level, then we would expect daily chart sellers with weekly chart breakdown sellers to push price down toward the next inflection target into $715.

We don't know the outcome of a given set-up, and we can only plan if/then contingencies and manage positions that trigger as price moves toward a target level or away from an inflection level.

While we can stop the lesson here with the daily/weekly integration, savvy traders will take it one step further to view a frame lower than the daily chart for clues on the chart that are developing as price interacts with this critical support area.

Here's the quick view of the 30-min intraday chart as Google (GOOG) closed into the $766 20 week EMA 'make or break' level on April 18:

chart
Click to Enlarge

I won't comment too much on the lower frame chart other than to say momentum revealed a positive divergence relative to the early April price low into $770 when compared to the 'current' push into the $766 critical inflection level (a bullish signal).

We also see a falling parallel trendline channel intersecting the $766 level as price trades into this inflection zone (this is also the entire “flag” trendline as seen on the weekly chart).

Once again, we don't know if Google (GOOG) will hold and reverse here (a bullish trade, if so) or else breakdown and continue the short-term downtrend (a united daily and weekly breakdown sell signal, if so).

The key is seeing the importance of the potential inflection level on the weekly chart that can't be seen on the daily or intraday charts.

By the way, here's the outcome of this lesson and set-up:

chart
Click to Enlarge

Buyers stepped in at the $766 inflection level, turning the tide back to demand/bulls and the outcome was the pro-trend continuation set-up as seen on the weekly chart.

Perversely, those who viewed the daily chart and took the valid "title="https://www.moneyshow.com/articles/DAYTRADERS-29394/Profiting-from-Failed-Breaks/">breakdown signal later contributed to the upward price action as they became buyers to cover their short positions, creating a temporary 'feedback loop' or small short-squeeze.

For trading triggers, aggressive traders can buy as price trades along the higher timeframe support level while conservative traders can “wait for additional proof” in the form of a breakthrough above the falling trendlines and/or falling daily EMAs, both of which occurred under $800 as highlighted.

By Corey Rosenbloom, CMT, Trader and Blogger, AfraidtoTrade.com <http://www.afraidtotrade.com/>

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