Why Watching Long-Term Charts Is Important for Short-Term Traders

If you’ve been watching shares of leading stock Caterpillar (CAT) recently, you probably noticed something extraordinarily unusual…at least from a price standpoint.

First, a current chart:

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In a permanent reminder of why watching price levels on the higher time frame is important to both investors and traders, Caterpillar shares again brushed up into an overhead brick wall of resistance at the $80 per share level, paused for a very long time intraday yesterday, breached the level for the first time ever this morning, and then subsequently collapsed in a painful selloff for CAT bulls.

Let’s start with the monthly frame and then inch our way down to the lower frames to see this unique development—and discover an important lesson.

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I don’t intend to do full-scale technical analysis on CAT, but mostly, I want to point out the prior price rejections at the $80 per share overhead “Brick Wall” level in 2007 and 2008.

NEXT: Multiple Time Frame Analysis on CAT Continues

It’s really neat to see a level so clearly hold as resistance. You don’t need fancy chart indicators to clue you in that $80 is a very important level that investors find to be too expensive for shares of the company.

So, $80 is clearly key to whether this rally will continue (likely if above) or be stopped again dead in its tracks—as has been the case twice before.

I wanted to show these intraday charts more for educational reference than as a call to take action now. This is a lesson in how to combine higher time frame levels (resistance at $80, for example) with intraday behavior (a clear pause at the level and breakdown last week).

Let’s drop it to the 30-min level now from last week:

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It’s not that I’ve never seen anything like this, but it’s cool when it happens in realtime before your eyes.

Caterpillar buyers struggled against sellers at the $80 level, and this has been occurring since the price impulse to the $80 level on September 24.

Like the stock market as a whole, Caterpillar struggled at the highs of the last few days and formed a similar rising trend line pattern into overhead resistance.

This is price purism at its finest—in terms of overhead resistance really mattering for intraday traders and investors.

And after shares of Caterpillar witnessed the “Thrill of Victory” last week by pushing above $80.00 for the first time ever, the “Agony of Defeat” immediately set in:

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Ouch! Can’t say that the chart didn’t warn you that $80 is an important level. It was the case in 2007 and 2008, and perhaps now we’ve locked in another annual high at $80 in 2010.

Keep monitoring the share price at this level. A rise back above $80 certainly is not impossible, but participants should be aware of the importance of $80 as a widely known level of overhead resistance.

It’s also a lesson in the importance of pulling back the perspective on shorter time frames to make note of major price level—simple price levels—on higher time frame charts.

They often matter on lower frames, and if you don’t know those levels are there, you’ll likely be blindsided unnecessarily.

By Corey Rosenbloom, trader and blogger, AfraidToTrade.com