Why Short-Term Traders Should Use Long-Term Charts

Many short-term and position traders ignore some of the most valuable uses of longer-term charts. I hear many short-term traders saying things like, "What do I need to look at monthly and weekly charts for, when I'm trading for just a few days?" What's interesting is that many of the very best short-term traders hold just the opposite opinion. In my own trading, most of the very best short-term trades I've ever made, those ten-baggers and higher, have come from interweaving long-term charts with very short-term opportunities. Let me give you a brief look at two ways of using longer-term charts to enhance position and short-term trading. Let's look at how to use trend channels and long-term previous support/resistance levels to improve your trading position.

A trend-channel (which is most commonly base on a weekly chart, but sometimes on a daily, intraday, or monthly chart) is an extremely valuable tool that is extremely simple to use, and often hugely profitable. I remember vividly sticking my neck out and risking 50 points in a sell signal off of a weekly trend-channel resistance level in the Swiss Franc in the 1980s, and being able to pay for the next year of college off of a one-contract 1300 point profit. I've been using trend-channels to enhance my trading ever since. Here are a few examples of ways to use this simple but valuable tool.

Our TradingMarkets.com "Top RS New High List" is produced on our site every day, and it allows us to view all of the new highs that also have strong relative strength and strong earnings growth on a daily basis, so as not to miss any big potential winners. One stock that appeared with frequency on these lists starting in May-July, then again in September-December, and again recently, was Audiovox (VOXX | Quote | Chart | News | PowerRating) (actually, the symbol was VOX earlier in 1999). VOXX developed a beautiful daily chart trend-channel that was validated in September, 1999. Please see Figure 1.

Figure 1.

A trend-channel is "validated" when three points are confirmed as acting as support or resistance. Thus we can draw a simple up-trendline connecting the points labeled "A" and "B," and when the stock gets support and rallies off of point "C," the trendline is validated. We can also take the A-B trendline and move a line parralel to it up to the last significant high. If we get another "new" high that bounces off of this parallel line, that can also be considered validation. In Audiovox's case, point "F" validated the trend-channel, but since "C" had already represented a third point of validation, we already knew that at least the uptrend-line was valid after the market bounced off of "C."

In September, Audiovox made a new high, breaking out of both a flag-pattern (our favorite buy pattern), and of a cup-and-handle on good volume and on a thrust pattern. Points 1, 2, and 3, where Audiovox came down and tested the uptrendline, could then be used as points to move up ops's and to add to positions. Simple using a breakout above the high of the day that tests the trend-channel support and an ops a tick below that day's low, yielded two trades that returned over ten times risk in profit potential. Shorter-term traders could use these "tests" of a valid trend-channel support as areas to focus on for even shorter-term entry methods (as we'll show in the MSFT example below).

Figure 2.

Figure 2 shows another stock that appeared frequently on our new high lists last year, Microsoft (MSFT | Quote | Chart | News | PowerRating). While we wouldn't personally have traded Microsoft on a position-trade basis because its PE in relation to growth and growth potential were not favorable, Microsoft could be traded on a short-term basis. Microsoft made the more common weekly trend-channel. Taking the trendline from "A" to "1" and then making a parallel trendline up to "B," we can see that point "C" acts to validate this trend-channel by being a third point of proof. At point "3," Microsoft comes down to within a point of its weekly trendline support. Notice that volume declines during the price decline into weekly trendline support.

Figure 3.

Figure 3 shows Microsoft on a daily basis as it hits the weekly trendline support. Notice that volume declines during the price decline into weekly trendline support. (We've also noted how Microsoft had a distinct decline on volume on the rise into trendline-channel resistance at the 120 level, which led to a decline of 25 points.)

Figure 4.

Finally, Figure 4 shows a half-hourly bar chart of Microsoft. Notice that as Microsoft hits 95 weekly trendline support, it quickly thereafter breaks a half-hourly down trend-channel resistance level, near 98. Here, Microsoft confirms that it is getting support at the weekly trendline and could be bought with a 94 3/4 ops. Notice also that on a half-hourly basis, Microsoft has since embarked on an uptrend channel that has been validated. Investors could have taken full or half profits on longs from 98 at the 107 level, when half hourly trendline support was broken, for a seven-day 9 point profit on a 3 1/4 point risk. Longer-term bulls could hang on with an ops below the last trendline support level at the 104 level. This example illustrates how looking for support via a weekly trend-channel support level and then focusing in on a shorter-term chart, led to a profitable short-term trading opportunity.

Even shorter-term traders could have focused in even more closely for a much lower risk-trade via the five-minute chart. On a five-minute chart, Microsoft made a double bottom, right off of weekly trendline 95 support. Microsoft could have been bought on a 96 stop with a 94.75 ops, based on the breakout of this five-minute double-bottom formation. Taking profits as per above at 107 then delivered a hefty 11 point profit on a 1 1/4 point risk, or nearly a nine-bagger in just seven days. Clearly it pays short-term traders to look at longer-term trend-channel support levels!

Figure 5.

Another method I use long-term charts for is determining potential support for short sales. The simple rule is that prior support levels that led to monthly rallies, become potential support when stocks decline to those levels again. Thus, Figures 6 and 7 show that Goodyear (GT | Quote | Chart | News | PowerRating) and Norfolk Southern (NSC | Quote | Chart | News | PowerRating) have broken key support and have a significant number of points to go down further before they hit past support levels from here.

Figure 6.

Figure 7.

Whereas Figures 8, 9, 10, and 11 show that both United Asset Management (UAM | Quote | Chart | News | PowerRating) and Caterpillar (CAT | Quote | Chart | News | PowerRating) are approaching significant past support levels on weekly or monthly charts, and that investors short these stocks should tighten up trailing stops significantly or else take at least partial profits until these significant suport levels are clearly broken. If an investor were contemplating a new short-sale, without the long-term charts, United Asset Management and Caterpillar would look just as favorable as a short-sale candidate as Goodyear and Norfolk Southern. However, as our look at the long-term support levels of these stocks shows, United Asset and Caterpillar are at levels where investors should consider taking profits, not putting on new shorts. Clearly, if United Asset and Caterpillar break strongly below these support levels--and those already short Caterpillar and United Asset from shorter-term patterns may profit greatly by exiting on any signal of a rally off of these support levels (à la Microsoft example). Therefore, looking at prior weekly and monthly support levels is a significant aid to short-term traders and position traders alike.

Figure 8.

Figure 9.

Figure 10.

Figure 11.