On part II using AAPL's three main time frames I tried to explain in detail the signals that price sent when the major top and bottom were made.
On part III We'll look at two signals of a topping process, one is very easy to identify the second one is not as easy:
Please read the note at the bottom ******
On example A The topping process is easy to identify using the monthly chart because after three giant candles the next one formed a hanging man (I think that is what that candle is called).
Do you really think that AMZN Has another 50 points higher at that point without a decent pullback to form a higher low pivot?
Example B The monthly candle is not as easy to identify as the top because it requires more in depth analysis as you are analyzing it while it is still forming and for that you need to apply tools like Fibonacci retracements if the smaller time frames are giving you reasons to do it, such as the daily chart just put its uptrend in question, just established a new downtrend DT. Or a nasty lower gap opening just disrupted the uptrend. Etc. Etc.
After price has retraced say more than 60% the monthly surge you now have enough reasons to believe that if that DT. On its daily chart continues the monthly candle can end up with a nasty topping tail like the one marked with two blue arrows, and you don't want to be long a candle like that after an extended move higher.
I personally don't use Fib. Retracements, that said it's a good tool for measuring the momentum of price in a given time frame or candle, any stock that holds <75% of its upward impulse is very bullish. <60 is bullish. <50 barely bullish. <40% neutral but has a chance to keep moving higher. >40% the odds are high that it will go back to test its lows.
An that is just a small part of the whole picture, there a many issues to consider such as what the larger time frame is signaling, support, resistance. Etc. Etc. Trend pivots are marked purple.
So you get an idea of how impossible is to anticipate a top with out the help of the right chart, take a look at AMZN Last 14 months, specially the last five, it moved from 275 to 400+$. Anybody calling and shorting the top during all that time was very wrong.
Back to the hanging man candle on the monthly chart, it graphically shows you that buyers are exhausted, sellers are nowhere to be found and shorts are afraid to push their luck and for a good reason, the weekly chart was "consolidating" And it will breakout after that to the folks not using the monthly chart, but now you know better of how large was the last move and how the odds favor a decent drop.
All that consolidation during the last eight weeks on the weekly chart seen through its daily chart, AMZN Hasn't given any clear signal to short and hold for a longer period of time other than short the top of the base or first 2X top and then the 3X top, and then cover at the bottom of the base if price doesn't close under a HLP. WITH CONVICTION.
Because it hadn't closed below any HLP. To signal that the trend was about to change on the daily chart, that is until yesterday when price finally closed below the HLP. And base.
AMZN Needs to form two more lower highs and one more lower low to signal its intentions to downtrend, giving you an edge to hold your short for the drop.
If one shorts here, with the daily uptrend in question the weekly chart can be forcing this drop to form a set up bar to try to form a HLP. If that is the case it will fail to form the second lower low, form a higher low instead on its daily chart and price will move back to the top of the base, call it a descending wedge failure.
For more on the setup bar and trend pivot formation read here:
http://chalannn.blogspot.com/2012/08/pivot-formation.html
YOU HAVE TO RESPECT THIS ACTION: It does not matter how extended the monthly chart is, if the smaller time frame or daily chart doesn't close below a HLP. It's not going lower as has been the case in the last five weeks, thus frustrating the shorts expecting lower prices and being forced to cover on the bounce at the base.
The daily chart has to have a trend change for the larger time frames to move on same direction just as AAPL Did on the on part II.
This topping process on the monthly chart is a bit more difficult to identify but you have to get an idea that is happening because the monthly chart had three giant candles that nearly doubled its price.
Lay a Fib. Chart engulfing the last month's candle.
Go to the next lower time frame TF. Or weekly chart and measure the slope and look for signs of weakness there, compare the size of the five green candles during the first impulse versus the four green ones on the second one.
The first red candle at the top on its weekly chart was formed with a 2X top on the daily chart signaling the weekly chart stops moving higher, after that price dropped violently to support on the daily chart, the rising 10 MA. On its weekly chart and the 50% Fib. Retracement on the sixth green monthly candle, sending price back up to the bottom of the daily base and forming a big bottoming tail.
At that time you would think that is forming a HLP. To move higher (if you are not looking at the monthly chart) and thus the reason for the violent bounce, once the HLP. Formed on its daily chart the ensuing bounce was weak (blue asterisk) Formed a LHP Sending price lower to test the HLP. Which held price for a three days but finally giving way because the candle on the weekly chart was expanding lower.
The daily chart now has one lower high and one lower low, under its R20. And R50 SMA. The weekly chart in the middle of a deep pullback and the candle on the monthly chart lost more that 70%.
What will happen next? bar by bar analysis will show you in real time, as was the focus on previous lessons on using the smaller time frame to get clues about direction on the larger TFs.
This lesson was about identifying tops using candle signals in the three main time frames.
Another great point is that DDD Had a violent drop to its rising 20 MA. On its daily chart but was able to form a HLP. And kept moving higher and pivoting higher, basically showing you that violent drops gives you clues about something happening but if it doesn't go lower immediately then it begins forming HLP. To begin moving higher.
Basically don't fight what you are seeing with what you are thinking.
Trade what you see not what you think.
****IMO Technical analysis helps you measure what the masses are feeling at a given moment, that said once AMZN Releases its earnings announcement the reaction to that will have a big unknown impact on the charts, the action described here only applies for the days excluding that announcement..
Major news breaks have the power to change the equilibrium from one side to the other and TA. Takes a temporary rest.
Click here for the follow up to this lesson:
http://chalannn.blogspot.com/2014/02/revisiting-some-monthly-charts.html
There are many in depth technical analysis lesson explained as simple as possible on the first pages.
Feel free to read them and learn from them before they are gone.
Feel free to leave a comment.
All charts were created with Scosttrade's Elite.
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