The most basic:
One reader asked me a great question: What signals do I look for when the monthly chart is about to turn higher or lower?
I had mentioned many times on my other lessons that when the larger time is about to turn all signals happen on the smaller times frames (TFs) First.
First who uses the monthly chart? Mutual fund managers are known to use the monthly chart.
I personally rely on the weekly chart more but the monthly chart I've discovered can explain some strange bounces as was the case with the chart that I posted to close monthly chart part I lesson.
And the reason for that lesson was not so much about how to look for entries but to try to shed some light on the bearish cycles you'll be facing if you decide to make some easy money catching some falling knives inside the largest time frame and the stock keeps falling with you holding it and not knowing why it keeps falling.
On the chart above of the Qs its daily chart is in an uptrend and having a normal pullback, the day before the 60 minute chart closed in a downtrend DT. It had two lower highs and two lower lows (red asterisk). The next day the Qs opened higher with a higher opening gap at the high of the previous day, forcing some shorts to cover giving the Qs a bounce the first hour as shown by the close near the high on the first candle on the 60 minute chart, That hourly candle also closed with conviction above the two LH Pivots thus canceling the DT. Needing one more higher low and one more higher high to re establish the uptrend again on this time frame. After the first hour the Qs began declining and got near the previous day low (blue asterisk).
The 15 minute chart on the same higher opening gap cancelled its DT. The same decline was hard enough but still held price higher than its previous day's low, then formed the most basic sign (provided That the larger TFs are setting up the right pattern and signaling that they are about to turn higher): A higher low
The 5 minute chart and the fastest of all the time frames on the chart did enter in a DT. The first signal it sent that the 60 minute chart was going to turn was forming a HL (green asterisk) because if this TF Keeps waving lower there won't be a HL On the intraday time frames and the daily chart will keep going lower under the previous day's low or much lower even. (As you'll see on the daily chart below).
The HL On the 5 also formed a HL On the 15 and 60 minute charts (Green asterisks) As the day progressed the 5 minute regained its uptrend, both the 15 and 60 minute charts had little resistance overhead and both bounced back to the top.
And that is how the smaller TFs signal when the larger TF Is ready to move higher.
On the lesson last week It was explained that the monthly chart was forming a LH Pivot and thus the reason for the big drop lately and I wrote that even though the daily chart was in a clear DT. The weekly chart had what looked at that time to be forming a double bottom that possibly was going to force price on both the weekly and monthly charts higher.
That possible double bottom on the weekly chart was a window of opportunity to push price higher but with out the HL On its daily chart signal, price kept down trending and that double bottom pattern ruined, now price looks like it will do what AAPL did on the lesson monthly chart Part II.
Having a pattern that you recognize by itself means little if you don't have the signal that will trigger the expected outcome on said pattern and the trigger for me is? The most basic sign: a higher low on the smallest TF. You are looking at IF the larger TFs are setting up the pattern that you recognize will get price moving in the desired direction, in this case was the daily chart.
Two days later there wasn't any HL And the DT. Continued, maybe it will stop going down near the low established eight months ago, who knows? Follow the charts and you will know.
At any rate on WLT The daily chart now needs to form a higher low and a higher first and then another higher low and another higher high to establish its uptrend first to move both larger TFs higher.
The big difference between WLT And the Qs is that on the chart on the Qs the HL On the 5 minute chart is all that was needed to get the 60 minute chart moving higher because the larger TFs are in an uptrend so it doesn't take much to get the crowds pushing price higher, the same 60 minute chart that when begins moving higher gets both the daily and the weekly charts moving higher as described on this lesson:
http://chalannn.blogspot.com/2012/09/will-daily-chart-enter-downtrend.html
On WLT Was the complete opposite.
It works the same in all time frames as the second chart clearly illustrates.
THIS IS VERY IMPORTANT: The reason to wait for the basic signal if you have the right set up is because price or the smart money behaves differently at every different stage in the trend. When price is in a clear downtrend (Or viceversa) on all its time frames it keeps waving lower because the majority of professionals, including trading programs are shorting the bounce, combined with sellers getting out, once they see the basic signal occur, everybody notices the change in the charts and if price is at an area where support can be found, some shorts begin to cover, combined that with sellers exhausting, bargain hunters buyers will overwhelm the sellers, price stops going lower, putting the DT. In question, after that more buyers and more shorts cover and price begins to transition from a trend less state and if the buying continues it can actually form an uptrend as was the case on AAPL's daily chart once the weekly and monthly charts had retested their previous lows successfully.
Read that lesson and analyze the second 1/2 thoroughly and understand that as they say: The trend is really your best friend when you're investing in the markets.
Don't bet against me, the algos or the smartest minds in the industry. Stay with the trend or will be separated from your $$$.
Never go long in a downtrend unless price reaches climax confirmed by massive volume. Total capitulation of the other side. I'll do an analysis of that in the future.
If you want to read more about the way price cycles from the monthly to the 15 minute chart click here:
http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
Feel free to leave a comment.
FreeStockCharts.com Were used.
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