Never Miss a Sell Signal
07/19/2011 3:30 pm EST
Evaluating multiple time frames can help traders and investors to stay calm and objective and recognize the signals, particularly when navigating down markets, says Dr. Charles Schaap.
I'm speaking with Dr. Charles Schaap. Charles, what in the world is going on with the market? It's like the longest losing streak since 2001, some say.
Well, the market is doing what it always does, which is it goes up and it goes down. The most important thing as an investor, if you're only investing from the long side, is to stay in the times when the market is going up.
Right now, we have a warning flag that it could go down, so you want to be very careful and watch the market right now. If it falls further, then you want to back off on your long-term investments.
Are you using moving averages? What are you looking at technically to watch this for the sell signal?
The first thing is one has to look at multiple time frames. If you look only at a daily chart of the markets, your heart will go up and down with every up and down day.
You'll hear people on TV saying it's down for this reason and that reason, and we really don't know why it's up or down; it's what the market does. So the main thing is to remain objective. Look at multiple time frames.
So if you want to take a long-term view, I like the weekly charts for the average investor. I use the 50-week moving average. If price is above a rising 50-week moving average, you have a signal to be bullish on the market. If price falls under the 50-week moving average and if the average begins to decline, then we're heading into a bearish segment.
How about for the short-term trader? What multiple time frames would you suggest they look at?
Well, depending on what their goal is, I trade anywhere down to a one-minute chart, so I'm actually looking at bars every minute.
For the most part, you'll burn out that way, so for the intraday trader, using an hourly chart combined with a five-minute chart works very nicely on the indexes.
The commodities tend to be similar, although a ten-minute chart works well on those.
Do you look at the first hour and the last hour of trading differently from the middle of the day?
Absolutely. The market has specific times when it does certain things. For instance, the people that are working on the floor, at the markets, or even at home with their computers have to take a lunch break. So from noon to 1 pm or 1:30 pm, the markets are generally trendless and quiet, so that's not a time to be active during the day.
The most important time is the first hour of the day. During the first hour, the market establishes usually a high or low for the day and then it also establishes its direction for the day.
In the closing hour— we call that the “pro hour” or the “strong-hand hour” —that is where the market is marked up or down as to the wishes of the biggest, stronger hands in the market, and it tells its actual, final statement on the day.