Time Frame Divergences
Stockscores.com Perspectives for the week ending April 1, 2006
|
| Upcoming Events |
Stockscores Seminar Online
Not everyone is able to come out to one of the live seminars conducted by Stockscores.com founder Tyler Bollhorn so we have put that seminar on the Internet for you to view. Doing so is simple, just Click Here.(Requires Internet Explorer and the latest version of Windows Media Player. Works best on a high speed Internet Connection).
|
|
In this week's issue:
Our society has taught us to bargain hunt. The success of Walmart, Costco and the infinite number of dollar stores is due to consumers' desire to find a good deal. Many investors transfer that thinking to the stock market where it often fails to make them money. To make money from stocks that are showing weakness we need to understand the concept of time frame divergence.
There were many people seeking bargains by buying stocks that seemed to be on sale after the technology bubble burst in the first quarter of 2001. A stock that had been trading at $125 a share seemed like a great deal at $60, after all, it was less than half price. Unfortunately, most technology stocks continued to fall to much lower levels and five years later these stocks are still nowhere near what they once were. Buying stocks on sale was akin to paying for a nightmare.
To be simple, buying a stock that has shown recent weakness is only a good buy if that stock is likely to go higher. To determine that potential, traders should look for different messages from charts in different time frames.
A day trader typically looks at 2 or 5 minute intraday charts to determine entry and exit points. However, it is better to look at multiple time frames and use divergences between the short and long term time frames as an opportunity for entry. Consider a daily chart that is showing a breakout from an ascending triangle pattern, but the intraday chart has a downward trending flag pattern. The trader who looks only at the intraday chart would say sell. The day trader looking at both the daily and the intraday chart would be looking for an opportunity to buy the bounce.
This methodology can be used for any style of trader. Weakness in a daily chart is an opportunity for the long term position trader if the weekly chart is strong. A daily chart upward trend should encourage us to look for pull back opportunities on a 15 minute intraday chart.
There are a wide variety of traders participating in the stock market. Most of them focus on their outlook without consideration of what others may be thinking. They get caught up in the charts they are looking at and can lose sight of the big picture. Traders should always keep in mind that the longer term time frame is always more important than the short term.
Opportunities can be found when the short term chart time frame diverges from the long term. If the weekly daily and 15 minute charts say the stock is going higher but the two minute is headed lower, chances are good that day traders are getting shaken out of the stock and being taken advantage of by the longer term traders and investors.
I like to look for inflection signals in the short term time frame when it diverges from the longer term. If the long term outlook is higher and the short term is showing weakness, I will look for a break of the short term negative pattern as an entry signal.
In doing so, you are taking advantage of the emotional reactions of one group of market participants that conflict with the long term market outlook for a stock. Opportunities are created when market participants act emotionally.
Back To Top
Chart patterns that predict upward trends are often characterized by abnormal breaks through resistance from periods of low price volatility, typically from a period of rising bottoms. The Stockscores Simple Strategy and Market Scan combines the Sentiment and Signal Stockscores with other Market Scan filters to find these chart pattern set ups. The result is a scan that will generate a good number of high probability position trading opportunities each week.
Right now, the TSX Venture market is the strongest one going so I ran this scan on this market and found two good looking charts that deserve consideration.
Back To Top
1. V.GGY
V.GGY is breaking out from a period of sideways trading when the market agreed the stock was worth between $0.16 and $0.22 a share. The breakout took it through resistance and the volume traded indicates that many investors are excited about the company's prospects. Support is at $0.17.
Back To Top
2. V.SSV
V.SSV is breaking out from a pennant pattern and through the $1 psychological barrier.Volume traded on Friday was higher than any other day this year and the stock closed strong and at its high of the day. The stock has good potential so long as it can hold above support at $0.75 a share.
Back To Top
References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
Back To Top
|
If you wish to unsubscribe from the Stockscores Perspectives Weekend Edition or change the format of email you are receiving please login to your Stockscores account. Copyright 2006 Market Perspectives Inc.
|
|
