This is the chart of WLT That I used on the monthly chart part I. IMO Needed a follow up a week later. More on that at the bottom chart. 
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.
Sometimes after a drop lasting multiple weeks to support, I look for the conventional clues to find entry, such as waiting to enter after a weak technical bounce that I've seen in the past will reverse to test that low and the commitment of the new longs, and if said reversal is controlled, forms a higher low and gives me the signal that sellers are exhausted, I usually take the trade to capitalize on the highly probable stronger bounce.
But what if the higher low bounce is weak, unable to close above the first peak or lower high pivot (LHP). Forms a double top and collapses again taking my stop and dreams of riches with it.
Blame it on the monthly chart.
I mentioned before that as long as the smaller time
frame keeps moving lower the larger time frame will follow it and viceversa. Lets go
in more depth, this is one scenario but gives us an idea of how trends
or volatility on larger time frames affect the smaller ones and viceversa.
You have to understand trend pivot formation to understand this lesson, Please click here for that lesson:
http://chalannn.blogspot.com/2012/08/pivot-formation.html
A technical bounce is a necessary bounce to release some oversold pressure after a big drop, where the odds highly favor continuation of the trend unless some conditions are met, such as a powerful bounce or the bounce begins closing above lower high pivots.
The color boxes pretend to enclosed the activity like a X Ray into a given time period simultaneously.
1: A bear Flag was forming on the monthly chart, price formed a lower high pivot (Black arrow). Seen through the weekly chart, by the time the second purple arrow or lower high pivot (LHP) Formed, price was in a downtrend (DT) Under its declining 10 MA.
2: The action was forming a descending triangle.
3: LHPs (Purple arrows) kept forming and kept sending price back to support.
4: every time a higher low formed the ensuing bounce was weak signaling that there weren't big buyers to push price over resistance and/or close above a lower high pivot (LHP) To signal a solid bounce in the near future.
5: The last bounce looked weak and price collapsed the bottom of the descending triangle with an expanding red bar on both time frames. After that the weekly candles narrowed but price couldn't bounce because the monthly chart kept expanding lower thus pushing them lower.
6: By the fourth red bar on the monthly chart price finally stopped going lower, seen through the weekly chart price formed a double bottom, then a W bottom, then it broke down took stops, bounced back to the top of the range into a triple top, but price wasn't able to break out and close above a LHP. Not even once.
This action took a few months to develop and once in an attempt to breakout that failed, it formed a LHP. On the monthly chart (Black arrow).
If you've read my previous lessons you must have an idea of what would happen if that LHP. Wasn't nullified.
On the weekly chart next to #6 buyers had control of price, consolidating it for nearly six weeks at the top of the base but weren't able to break out of that quadruple top and price began to expand lower, collapsing that long base, basically wasting it.
1: Price collapsed again, seen through the monthly chart the candlestick began to expand (third red bar) On the weekly chart next to #1 it formed a narrow green body signaling that selling was decreasing but the next bar expanded red again, why you ask? Because that contraction of volatility happened in the middle of the expanding monthly candle that was falling under its own weight.
2: The big red expanding bar on the monthly chart finally ended giving the longs a rest, the weekly chart began healing, finding equilibrium between buyers and sellers. It had a technical bounce but only to form a LHP. Near its declining 10 MA. You have to know by now what follows after a LHP. Forms.
3: Exactly, the monthly chart did not form a bullish candle so it began to expand again but this time on capitulation volume.
4: Once the last long capitulated, buyers forced a technical bounce with ease to its D10 MA. Where it formed a LHP. And returned to test the low, where more buyers got in forming a double bottom (just analyze the size of that HL Green bar for clues about the commitment of the new buyers) Thus sending price above its flat to rising 10 MA.
5: Price kept riding the R10 MA. And eventually establishing an uptrend on the weekly chart, after that price collapsed again. Why?
The most obvious one is that it reached resistance at #2 and some folks trapped on the collapse to the left were able to sell, another one is that the bounce on the weekly was 50% the drop on the monthly chart, maybe needed more time to fix the massive drop. IMO the bounce was a technical bounce on the monthly chart to form a LHP. Combined with the other three.
Remember that the best way to anticipate what price will do next is to follow the formation of the next pivot, either another LHP. To keep going lower or a HLP. To challenge the last LHP.
6: Then price bounced again but was weak and looked ready to head lower again and it might.
7: It has a big drop on the daily chart, a narrow range body and possible double bottom on the weekly chart but most importantly what is that forming on the monthly chart? More on this later.
Daily chart:
8: It broke out all that resistance the way the weekly chart couldn't to ignite a bounce on the monthly chart on the previous chart. this breakout ignited a big move on the weekly chart that led to the set up bar (Possible LHP) On the monthly chart.
9: The daily chart was in an uptrend but a lower high 2X top sent price lower.
10: Since the monthly chart was in control, the pullback on the daily chart went under its rising 20 MA. And kept slicing through solid support until it stopped under it.
Had a technical bounce followed by a small reversal, formed a HL.
11: Price moved higher again, even closed above the LHP. Ending the DT. And putting the trend in a transition state from sideways to uptrend?
It needed one more higher low and higher high to establish its new uptrend so the pullback should had been buy able right?
12: If the monthly and weekly charts were in an uptrend then normally the rising 20 MA. Will be the area where price should stop going down, form a HLP. And begin the next cycle higher but not this time, price sliced through two HLPs destroying the hopes of the longs.
Why all this crazy action? Because the monthly chart is in control of price and is trying to form a set up bar and eventually will form a HLP. To begin moving higher.
How do I know? 1: The capitulation volume eight months ago.
2: The narrow range body on the weekly chart forming a possible double bottom and if it that double bottom sends price higher it will form a bottoming tail on the monthly chart that when tested next month it will not go lower giving longs enough time to form the HLP. To keep moving it much higher by summer.
3: The fact that it retraced 100% the last drop (Double bottom to #2) And the pullback even though it looks deep still holding close to 50% makes me bullish on my theory that the big drop was to form the set up bar on the monthly chart.
The stock is WLT On the closing week of 1/17/2014.
Only time will tell.
Time did tell. Read the follow up:
http://chalannn.blogspot.com/2014/01/monthly-chart-follow-up.html
Another one that had some crazy action on the weekly chart until the monthly chart finally stabilized and was able to begin forming a possible double bottom.
And then there is this one: If a picture is worth a thousand words, you figure this beauty out and your trading and/or investing will get much, much better.
Click here for the follow up to this lesson:
http://chalannn.blogspot.com/2014/01/monthly-chart-follow-up.html
Lesson#8: http://chalannn.blogspot.com/2014/01/the-monthly-chart-ii.html
For another lesson on how time frames cycle:
http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
I hope that you learned something valuable.
Feel free to leave a comment.
All chart were created with Scottrade Elite.
