Hilary Kramer has 30 years of experience on Wall Street; she was an analyst and investment banker at...
Weekly and Daily Conflicting Opportunities in IBM
07/08/2009 12:01 am EST
If you look in isolation at IBM’s daily chart, you might want to get aggressively short right here and right now thanks to a breakdown of support. However, if you look only at IBM’s weekly chart, you might want to get aggressively bullish thanks to confluence support. So, what does a trader do? Well first, let’s start with IBM’s weekly chart:
I actually cheated and added extra analysis for you to give a little more insight.
The main idea (ignoring the Elliott notation for a moment) is that the $100 price level offers three levels of confluence support, first from the convergence (and bullish crossover) of the 20- and 50-week EMAs.
Next, we see that a truncated Fibonacci grid from the 2008 highs (can you believe IBM peaked in mid-2008 instead of late 2007?) to the November closing lows yields the 50% retracement at $100.81.
Taken together, when a Fibonacci node intersects an EMA confluence, that yields powerful support.
Looking at these two facts, one might want to get aggressively long and place a stop conservatively around $98 or aggressively beneath $95.
With this bullish scenario in mind (again, ignoring the “bear flag” and Elliott Wave—we’ll come back to that), let’s look to see what IBM’s daily chart reveals.
Again, using basic technicals, we see a lengthy upswing that may be ending. Price formed a “shooting star” bearish reversal candle at $110 and has fallen to the $100 level, breaking down beneath the rising 20- and 50-day EMA, along with an up-sloping trend line connecting multiple lows.
There was also a negative momentum divergence that has peaked at the March momentum high—that’s a non-confirmation of higher prices.
Using this in isolation, a trader might get aggressively short and place a stop above $105 and play perhaps for a target of $84.
With simple technicals showing the weekly chart at confluence support, and also showing the daily chart breaking down from confluence support, what is a trader to do?
My main point in this post is to alert you that in most cases, simple chart reading will be effective. However, do not look at a single chart in isolation. Instead, always look at a higher (or sometimes, lower) time frame using those same simple technicals to see what the picture really is and if you’re seeing the charts telling a similar “story.”
In this case, you’re not, so if you’re a newer trader, it’s probably better to wait for a breakdown of confluence support on the weekly chart before getting short. After all, those confluence levels could hold as support, as anticipated. You can always move on and trade other stocks that have clearer patterns to you in the meantime.
As a bonus for more advanced readers, we see the Elliott Wave structure (possible count) hinting that a Wave C decline might be in the cards, as well as a potential to break down from a possible massive bear flag. Traders unfamiliar with chart patterns or Elliott Wave (and no, you don’t have to know everything to trade successfully) would be unaware of these additional insights.
Stick with what you know, know your risk on a trade, and study multiple time frames for structure.
By Corey Rosenbloom of AfraidToTrade.com
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