Trading Time Frames
Stockscores.com Perspectives for the week ending September 7, 2008
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In this week's issue:
At a basic level, the trader looks for the start of major moves and in doing so, often forgets about the opportunity to take advantage of the minor moves that occur along the way. It is possible to make small trades inside the bigger trade by changing the time frame used for analysis. However, doing so requires some pretty savvy trading skills.
The position trader looks for price trends with a duration measured in months. When I am analyzing a stock for this type of longer term trade, I look at a daily chart going back 6 months to understand the price pattern and then two years to see the levels of support and resistance. I won't take a trade like this unless it looks good on this longer term time frame.
But it is possible to improve entries and overall profitability by considering different time frames for analysis. The daily chart may say a stock is a buy but that does not have to mean buy right now. Switching to an intraday 15 or 30 minute chart can help to pinpoint better entry and risk management points.
Take a look at the daily chart of CCC, which made a break through long standing resistance on Tuesday. The daily chart was saying buy as a position trade but there was also a swing trade set up on the Stockscores Overnight Hold strategy since the stock was very price stable in to the close.
So, the long term trade outlook was buy this stock with an expectation that it was probably moving in to another leg of its upward trend (note: this was not a text book example of what I like to see but the overall market weakness makes it a bit difficult to find ideal examples, please humor me).
The shorter term swing trade, the Overnight Hold, considers not only the daily chart but also the intraday 5 minute chart. The objective with this strategy is to buy the stock before the close and sell it the next morning on the anticipated strong demand that comes at the open.
That particular strategy also tells you to sell the next day on a breakdown on the five minute chart. For CCC, this breakdown came at about a half an hour after the open, providing a 4% profit. Not bad for one day.
But, if we go back to the daily chart, we should be treating this thing as a longer term trade, a hold that will likely go for at least weeks. Why exit now? The answer is because you, as a Stockscores trader, are far more savvy that those working the trading desk on Wall Street (right?).
So, you sell the stock because the intraday chart says a breakdown is imminent but you have a view to getting back in when the timing is right. And guess what, for the next three days the price falls back better than 10%. You, the savvy trader, are looking for a cue that the profit taking pull back is nearly done and you can have a second crack to go long.
But what do you look for now? I like to go to the 15 minute intraday chart and look for an improvement, a sign that the buyers are taking back control. One sign is a break of the downward trend line, which occurred late in the morning on Friday. This also happened right at support on the daily, so there were multiple reasons for re-entry.
Entry here proved to be good, by the end of the day the stock had moved up 2% and looks likely to continue. If it does go for another run, then the intraday chart will again help us to move in and out of the stock. If it runs too quickly and moves away from the trend line, take the money on the first sign of breakdown and then look to buy it back on the pull back.
We can also use this strategy for the exit from a longer term position. I have been pushing a short sell trade on Potash (POT) for a few weeks, a position that has been working nicely. This week, I realized that the stock had come down enough that it was nearing the upward trend line where it was likely to find support and bounce. Wanting to lock in as much of the profit on the short as possible, I watched the 15 minute intraday for a sign that support at $152 was going to hold.
That signal came Friday when the intraday downward trend line was broken on the open, a signal to cover the short but, for the aggressive trader, a decent reason to consider the buy (because the stock had intraday support at $145 and was in the vicinity of strong support at the long term upward trend line). The stock then tested support before rallying in to the end of the day to close at $162.
Using the intraday for more aggressive exit and entry the other way saved 7% profit on the short and provided another 7% to the upside for the remainder of the day on the purchase. On the Sept $165 Call option purchased in the morning when the stock was at $152 (the point where the 15 minute downward trend was broken), the gains amounted to 110% (the option price moved from $2.95 to $6.20 by the close).
With returns like that, you can start to justify the extra time and effort necessary to make these trades happen. You might even be able to quit your day job so you can watch the market all day.
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I continue to believe this is a short term traders market, with the volatility that we have seen swing and day traders can best take advantage of the short term swings up and down. After strong selling for most of last week, I think we are due for a little bounce back. Although it probably won't last for long, those who have the ability to watch stocks intraday can take advantage of the move.
This week, I scanned for stocks on the TSX that had a Sentiment Stockscore of 60 or higher and traded at least 100 times on Friday. Only 75 stocks were found, an indication of how weak this market has been recently. I then checked the charts, I wanted to find stocks that were strong in the longer term but had suffered recent weakness and were therefore likely to make a bounce back. Two stocks stood out, I have them highlighted below.
Keep in mind that these are short term trades to consider if you are an experienced and active trader. If you are more passive, I suggest waiting for market conditions to improve. Sitting on cash has been a good strategy so far this year with the overall market down year to date.
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1. T.TOG
T.TOG was hitting new highs only six trading days ago, but then went in to a price slide that I think will end with the Friday lows. The stock broke the downward trend line on the 15 minute chart Friday and finally closed above its open. Should bounce back, perhaps back up to $21. Support at $17.40.
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2. T.CNR
T.CNR also hit new highs recently, four days ago the stock was trading at around $58. Friday, it closed at $53.73 but managed to close above it open, up for the day and broke the intraday downward trend line. Support at $51.90
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References
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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.
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