A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
More Time Frames, More Confidence
08/08/2011 4:48 pm EST
Analyzing markets using multiple time frames allows traders to make decisions based on more in-depth, reliable information and trade with more confidence, explains technician Corey Rosenbloom.
Even if you are a short-term trader trading on a one-minute or five-minute chart, it does help to look at longer-term charts as well.
Our guest today, Corey Rosenbloom, does a lot of that to help him make trading decisions. So Corey, how do you combine a one- or a five-minute chart with an hourly, even a daily, or longer than that?
Sure, let’s take the example of a major obvious level on the daily chart. Let’s say the zone of 1200 on the S&P. That came into play in November 2010; it was a very great opportunity for intraday traders, because that level served as resistance, but on the intraday chart, once that level broke, we called it a “popped stops impulse” (because) traders that were short above that level had to cover.
Of course, anyone that was long over swing trading or other kind of style of trading came into the market. So you have two forces of demand that are interacting on the charts; that is best picked up and best seen on the lower frames.
So on the example of an obvious, well-known, higher-time-frame support or resistance level, once that breaks, it is seen clearer with more information with volume and real-time momentum. If you are looking at the S&P futures internals—TICK, breadth, etc.—those can be confirmed and the trades can be taken with more confidence.
A breakout of a five-minute chart may mean nothing. If it breaks a daily chart level that a lot of people are looking at, that will tend to cause motion, and that motion causes opportunity for intraday traders.
Is it safe to say that the longer the time frame—a yearly area of support or resistance, or a yearly previous high or low—is more important than a monthly, a weekly, or anything else?
Absolutely, it is almost like a hierarchy of time frames; more traders look at the higher time frames.
Let’s say if I am a fundamental money manager, I don’t really look at technical analysis that much. I may look at a 200-day moving average, or I may look at an obvious break to a new lifetime high or a new record high in gold, or silver, or any kind of stock. If I want to look at adding a stock to my portfolio, I am more likely to add it at those levels.
So you have a confluence of, say, intraday traders. We think of the grouping of traders as constituencies; the intraday traders, the swing traders, the longer-term position traders, and then combine that with fundamental investors.
When a level on a higher time frame—a yearly chart or monthly chart, for example—breaks, that tends to create motion, activity, and movement, and opportunities on multiple constituencies, which translates on the charts as movement.
It sounds like even if I am a short-term trader, I need to be aware of a previous day’s high, a previous week’s high. How many of these do you take into account before you actually execute that trade?
It’s the bigger picture, and that is what we are looking at as the technical trader. It is more like as a trader, it’s the game; you put together the puzzle pieces. So it is just levels that people find important.
A lot of technical levels are self-referential and create self-fulfilling prophecies; so as more people see them, they talk about them, they Twitter about them, they see them on TV, and they hear them on the radio. They (then) begin to act.
So they are not magical in and of themselves, but it just shows what different groupings are put together and how they react. Either a new high will force the bears or short sellers to think the market should go down; it will force a decision: They have to cover at some point, because they are losing money.
Other people on the sidelines decide I may want to participate in this move, so that creates intraday movement on these different groupings. That is what creates a lot of the opportunities for smaller-time traders.
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