Clarifying The Long-Term Outlook Using Candlestick Charts
With
a bird’s-eye view, you don’t have to be
afraid of getting lost in the woods. All you have to do is fly up, look around,
and immediately you know where you are. Many shopping malls have directories in
map form, so you can quickly locate exactly where you are standing. In other
words, a bigger picture can be a great help in focusing on your destination.
Many traders make similar mistakes. Often, they are so busy looking for
daytrading opportunities that they become trapped in short-term frames such as
three- and five-minute charts. A five-minute bar chart may help a trader spot
the immediate direction of the market, but it is useless in detecting the
dominant trend of the market.
If you are a scalper, you need only three- or five-minute bar charts because you
do not hold stocks for more than a few minutes. But if you hold stocks for more
than an hour, you must arm yourself with longer-time-frame charts such as daily
and weekly, in addition to your own time-frame charts. Longer-time-frame charts
reveal important resistance and support levels, so you won’t be caught in sudden
reversals. In this lesson, I would like to show you how longer-time-frame
candlestick charts can help to clarify the long-term outlook of stocks.
As we know, some Internet stocks have been making a fierce comeback lately. For
instance, Amazon (AMZN) was trading slightly above just above 6 around the
time of September 11, but its value today at the time of this writing is in the
$14-$17 range, more than double. The obvious question is: Can Amazon continue
this upward momentum?
Let’s look at different
time-frame candlestick charts, and see what kind of insights we can gain from
them.
Below you see a five-minute chart of Amazon from 3/15/02. We can’t detect any
weakness at all. The stock is strongly trending higher in an orderly, predictable
fashion. It makes progress by consolidating, breaking out, consolidating,
breaking out, etc. Look how heavy transaction volume was in the last 30 minutes of
trading. What’s your forecast? I’m sure that after studying this chart, nobody
would be planning to short the stock.
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Now,
let me give you a different picture by showing you a daily chart of Amazon. The
rally action extending for five month seems to support the short-term case shown
in the above intraday chart. The stock is trading well above its 50-day moving
average. As you can see the stock is rallying off a pullback. So from a
technical standing, the strong uptrend makes things look rather bullish.
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The next
natural step is to study Amazon’s weekly chart. Can you convince me to buy the
stock after glancing at this chart? The only thing I can say is: Amazon is
rallying off its September 2001 low. And look at how Amazon is currently very
close to hitting a resistance level that sent the stock back South between April
and July 2001. This major resistance level has the potential to crush or at
least delay the rosy bullish picture you see in the intraday and daily chart. If
you look only at the short-term frame, the experience of seeing your apparent
uptrend halted in its tracks is like getting blindsided by some mysterious
hidden force. But if you see the bigger picture in the weekly chart, you’ll find
it’s not mysterious at all.
As of
this writing, the long-term trend of Amazon is still down, as its weekly chart
reveals, but daily and five-minute charts indicate tradable patterns. If you use
the five-minute chart and daily charts, you would tend to be bullish.
By adding weekly charts to your toolbox,
you may even look for potential short opportunities. The lesson here is loud and
clear. Don’t trap yourself into one time frame alone. Remember, successful
traders have a bird’s-eye view of the market.
Good luck and happy trading.
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