On the monthly chart part I. I tried to explain in detail the big influence that the monthly chart has on the behavior of price on the lower time frames.
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.
I have to admit that for a very long time, this time frame was never part of my daily analysis, and for a good reason, it does not help most of the time but when it does it can give some monster signals.
AAPL Had a multi-year move that was the envy of most
companies, some folks were very happy holding it, some very unhappy
because they sold too soon, some ended their trading carriers getting
their shorts squeezed, others because they bought too late and were turned
into bag holders.
Had we all paid attention
to the monthly chart and some basic technical analysis, we would've had
better results if we were paying enough attention when all three time
frames flashed the short with gusto signal.
The purple arrows indicate trend pivots.
1: AAPL monthly chart displays the move from 308 to 708$ in 20 months.
Back to the early stages, after some 5 month consolidation it breaks out to the biggest move from 430$ to 640$ That lasted 4 months.
2: Then pull back some as seen on #6 on the weekly chart.
3: The next move higher starts at 520 and ends at 705$. That was the top.
One of the most basic tools that technicians have on their toolbox when using charts is the ability to visually measure the slope or potency of each bounce and compare it with the previous one to identify strength or lack there off and AAPL Screamed trouble on its last move higher as its strength on the new move left much to be desired, if you saw that chart back then.
6: Shows the deep pullback on the weekly chart (it was expected after a massive 210$ move in such a short period of time).
7: Being that it was a deep pullback it bounced hard enough but couldn't retrace 100%. The bounce stopped short (that is what normally happens on deep pullbacks).
8: Had a shallow pullback to form a higher low pivot (HLP) Signaling highly possible higher prices ahead.
9: Broke out and closed 708$ New high.
10: Formed what some technicians call the NR7 or the smallest of that least seven bars after moving higher for eight straight weeks higher, the monthly bar #4 had the fourth green bar when the weekly chart gave the NR7 Signal, two red candles/weeks later had turned the monthly candle into a narrow body topping tail.
On said top the daily chart had a head and shoulder pattern that triggered the sell off (The right shoulder is basically a lower high putting the uptrend in question) once the neck line broke (solid support) there was nothing to stop the violent drop from both the monthly and weekly charts, price bounced back to now new resistance and declining 20 MA. Only to form a lower high pivot LHP. And continued moving lower.
After that gravity took hold shown on #5.
Same thing happened on the weekly chart (It had a fractal or sideways H& S Pattern).
After an eight week drop, price closed below the HLP #8 And when price bounced it stopped at a now new resistance only to form a LHP And head lower, it tried to form a double bottom but the following bounce was weak, formed another LHP And kept going lower because the monthly chart was pulling the other two time frames lower.
Every bounce on the weekly chart was weaker and kept forming LHPs until the monthly chart finally bounced off its own support hard enough to form a potent bottoming tail.
Basically the decreasing slope on the monthly chart was the first and biggest signal, (having a signal means little, you need the triggering event). The final nine week's levitation to make new highs left no support underneath if prices were to drop, the NR7 combined with the fourth green candle turning into a topping tail on the monthly chart, the head and shoulders pattern that triggered the breakdown.
In the end when all sellers try to get out from a shrinking door, that is what happens, most parabolic moves end this way.
I'm posting this chart so you get an idea of what it takes to turn the monthly chart around.
1: After the top was formed as described in detail above. AAPL Kept falling for seven months, on the seventh month it finally bounced off support on that time frame, forming a giant bottoming tail.
Seen through the weekly chart the bounces kept getting weaker and kept forming lower high pivots LHPs under its declining 10 MA. When price finally had a big bounce as seen inside the black box, it was strategically the right time to bounce because before that bounce the monthly chart had a very big red bar, the potent bounce the last 1/2 of the month formed the bottoming tail on that time frame.
Seen through the daily chart it was a very potent bounce, it retraced 100% the big drop, looked like the longs were ready to go for a much bigger bounce after some consolidation, right?
2: NO. As potent as that bounce was, seen on the weekly chart price was never able to close above a LHP. the trend was still down. AAPL Consolidated for five weeks and the weight of the drop on both the weekly and monthly charts were felt again pushing price lower to test the lows.
Seen through the daily chart it had a deep pullback and the higher low bounce was weak thus forming a lower high pivot that sent price back to test the lows.
The month ended the day price formed the first green candle near the previous low seen on the daily chart, the next day and new month, price opened with a higher opening gap (green circle) and took off. Doing two very critical things:1 leaving space between the red and now new green higher low bottom of the following month's candle that turned out to be first big green candle and confirming the double bottom on the monthly chart.
2 It sent price above the 1/2 bottoming tail higher low double bottom on the weekly chart.
Price kept moving higher for two more weeks and the daily chart began forming a HL. And a HH.
3: The black arrow points on the weekly chart to the area were price began to form a set up bar at resistance. Had that setup bar turned into a LHP. Given the right time, the odds of testing the double bottom were very high.
Seen through the daily chart it was just a pullback with the trend in transition ready to establish its new uptrend.
This link explains the set up bar:http://chalannn.blogspot.com/2012/08/pivot-formation.html
4: Another higher opening gap closed the daily candle above the higher high pivot establishing a new uptrend and cancelling the danger of the set up bar as price kept moving higher on the weekly chart, the monthly chart kept getting bigger and greener.
5: The uptrend continued on the daily chart, now with the help of the larger time frames and price finally broke out.
All in all, the pullback was so violent that the monthly and weekly charts had to form a double bottom first and the daily chart had to establish an uptrend to get the larger time frames moving higher again.
Twice the larger time frames were flashing the short with a vengeance signal at the top and buy with gusto signal at the bottom if you were paying attention.
Lesson#9: http://chalannn.blogspot.com/2014/01/the-monthly-chart-iii.html
If you want to learn more about time frame cycles read here:
http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
Feel free to leave a comment.
All charts were created with Scosttrade's elite.
