When you view the latest moves in a security and are trying to decide on the best entry or exit price, it is generally best to look at a time frame greater than your chosen trading timeframe. You can often learn things, as well, by looking at a timeframe shorter than the one you wish to trade in. Finally, of course, you will want to look at the timeframe you intend to trade in. If all three of these are in agreement, that usually provides the strongest signal.
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What do I just say? That sounds like a lot to take in and can it really have any meaning? I would argue that the large financial institutions in the markets today are using computers to trade based on algorithms to take or exit positions. These computer generated trades are known as program trading and you can see the effects of it when trading is increasing in volume rapidly and prices really begin to move. Since the computers look at various timeframes to decide how they will trade, it behooves even non-traders to understand when you might have an advantage in entering or exiting a position.
Let’s take a look at something we have been talking about for weeks now, the Philadelphia Semiconductor index (SOX). If we look at the daily chart for the SOX, you will see what we continue to share, in that it has been “walking the band”.
We note the Friday’s departure from the band is a warning sign that not all is well with the semiconductor uptrend. Another warning sign is that the RSI, which had moved above 70 reversed. It hasn’t yet moved back below 70, but if that occurs, most chartists consider that a bearish sign.
Let’s take a look at the weekly chart to see if we can glean anything else.
The weekly chart shows a correlation of movement up to the Bollinger Band but the weekly chart didn’t see the walking of the band recently. A departure from the band in the coming week would likely see a move back down to the 50-Day or 100-Day Moving Average, which interestingly enough would be around the same level as the 200-Day moving average. That is a lot of aligned support so a bounce would be likely. A break of that support would be truly bearish and would likely lead to a protracted move lower for the markets, in general. We don’t expect that to occur, but is something we would watch for and take advantage of if it were to occur.
We won’t bother showing the hourly chart, but it shows that the SOX rebounded off the upper Bollinger Band and moved down to the mid-point, which is the 20-Hour Moving Average. A bounce from there would likely see another move up to challenge the upper Bollinger Band.
What does looking at all three tell us? Since we are position traders, it is likely that the SOX are nearing a local high but haven’t necessarily reached it yet. In fact, they could decline from here but have support not far below and would likely see another rally attempt before reversing the long term upward trend. Therefore, it isn’t quite time to abandon any positions you are long in the semiconductor index yet.
Can we do this for the markets in general? Let’s take a look at the S&P-500.
Here we see that the S&P-500 looks very strong on the daily chart and hasn’t shown signs of weakness, even though it is in oversold territory.
The weekly chart suggests the beginning of a nascent uptrend. A failure by the bears to deflect the last move higher is likely to see further money flowing into long positions and could sustain a more prolonged bullish move. The May 2008 battle was lost by the bulls. The current battle sees the bulls with an edge but the coming week will decide the longer term path for the markets.
The hourly chart (not shown) shows the S&P-500 in rally mode with a continued move higher, but weaker than before, failing to trade along the upper Bollinger Band. This suggests a bounce down to the 20-hour Moving Average or even to the lower Bollinger Band before the next move higher.
We can take a look at hourly charts after the close on Monday or Tuesday in the coming week to determine the likely short term direction for the semiconductors and the S&P-500, in general.