Trading Strategy: My Spin on Using Treasury Yields to Trade the S&P 500

From the MarketSci Blog, an interesting strategy that involves an active trading strategy:

Strategy Rules: Go long the S&P 500 at today’s close if the 5-day exponential moving average (EMA) of 10-year treasury yields is falling. Close the position and move to money market when the EMA is rising. This test is frictionless, and to compare it accurately to Boucher’s strategies, I’ve assumed money market returns equal to half of the nearest 3-month US Treasury bill.

In a nutshell, the strategy is bullish on stocks when treasury yields are fallng relative to very recent history, and neutral/bearish when yields are rising.”

For the number-lovers, below are stats for this strategy relative to both the S&P 500 and strategy #1 from my previous post:

2008111502

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Markman: An Ugly, Unrecognizable Recession

More good news (no, not really) from Jon Markman: An Ugly, Unrecognizable Recession:

[bold/italics added]

Feeling frugal? You’re not alone — not by a long shot — as butchers, bakers and billionaires alike are feeling the credit crisis this month in a way not experienced since at least 1946 or even 1938.

It’s not just a temporary wave of Scrooginess that’s to blame for a retail-sales drop of 7.4% in November and much worse expected for December. It’s the combination of two tidal waves of demographics and the global business cycle combining to swamp the middle class, the wealthy and corporations as the recession enters its second year.

If the apathy you’ve felt at the malls or seen among friends and family is alarming, it’s mostly because nothing in our experience, or even most of our parents’ experience, has prepared us for a prolonged slowdown. It’s almost as if you need to hear the whispers of Civil War widows, or at least see some Depression-era movies, to understand the drain of emotion and hope that has sapped the energy of the full range of the American caste system. Except for those who were already very poor coming into this period, and a few sports and entertainment elites, no one is immune.

Boomers busted

This is largely because all of our economic texts and commentary were created from data that followed the 1944 Bretton Woods conference, which established the U.S. dollar as the world’s reserve currency. The post-World War II era harbored the profound societal changes that accompanied the birth of 78 million baby boomers between 1946 and 1964. Recessions tended to be relatively short during the postwar years thanks to the insatiable thirst of the boomers to buy stuff.

During the real-estate slowdown of the early 1990s, many boomers were in their 30s and still in accumulation mode as they bought homes, cars and early versions of home theaters that started with VCRs. The bursting of the dot-com bubble hit the average boomers’ retirement portfolios while they were in their 40s, the prime earnings years, and they were therefore able to quickly bounce back and resume the move toward bigger homes, cars and vacations from 2003 to 2007.

Things are much different this time. The median boomer came into the current downturn in his or her 50s, edging closer to retirement in a state of precarious financial health. After a 20-year buying spree, nonhousing durable-goods assets nearly tripled to $40,000 per household. Fueled by the twin forces of a declining birth cycle and the increased availability and acceptability of credit, this accumulative phase is coming to an end.

Bankers, the new villains in America now that we’re tired of just blaming CEOs, deserve a lot of the blame. The repeal of the Depression-era Glass-Steagall Act in 1999 — which brought down the wall separating commercial banking and investment banking — combined with low interest rates and heightened risk appetites to feed a credit binge that caused U.S. debt-to-income ratios to go parabolic. All of this was unsustainable because it was powered by rising asset values, not income growth.

Our new economic reality — our “frugal future,” in the words of Merrill Lynch economist David Rosenberg — will be marked by reduced discretionary spending, higher savings rates, asset liquidation, debt repayment and reduced accessibility to consumer credit. It will also not be buttressed by rising flanks of new consumers, because the children of the baby boomers are a smaller cohort and immigration policies are unlikely to change drastically.

The bad old days

The dynamics of this economic future have much more in common with our distant economic past. While a typical post-WWII recession has lasted 10 months, the average length of a recession dating to the Civil War has been 18 months. And recessions spawned by credit crises have averaged 20 months.

Since the current recession began a year ago this month, we can therefore expect a slow recovery beginning late next summer at best — but more likely in early 2010. ISI Group in New York is forecasting U.S. gross domestic product to contract 3% next year, which would be the worst calendar-year span since manufacturing crashed after World War II in 1946.

The mediocrity of the recovery would stem from the decline in household purchasing power: Falling asset values, both households and retirement portfolios, have caused household net worth to drop more than $7 trillion over the past 12 months, compared with a $2.8 trillion loss during the dot-com bust. Yeah, it’s nearly 2 1/2 times worse this time. The historical relationship between net worth and disposable income has Rosenberg looking for the savings rate to rise to 4% as households rebuild their balance sheets, which ought to result in a four-alarm calamity for retailers.

Indeed, during the third quarter, nearly $30 billion in consumer debt was repaid. This is the beginning of an epic change in the way society views financial profligacy and prudence. As a result, a recovery in housing, autos and other consumer discretionary categories will be long and painful. And without some stability in the housing market, it will be difficult for the incoming Obama administration to stabilize the financial system while trying to spur enough government spending to offset the newly frugal American consumer.

Anyone hoping for a gigantic stimulus package to bail out the economy will be very disappointed, because when you combine a massive housing downturn (5% of GDP) with a massive business spending downturn (10% of GDP) and add a massive consumer spending slowdown (70% of GDP), you would naturally need an incredible amount of new spending to emerge just to create an offset. If fiscal spending amounts to $600 billion next year, it would only replace the amount of private-sector spending expected to withdraw from the marketplace in 2009, not add anything really new. Merrill Lynch has calculated that just to keep the unemployment rate from topping today’s 6.7%, a 15-year high, a stimulus package of $1 trillion would need to be added on to the $1 trillion deficit the U.S. is already running.

These are among the many reasons that I expect 2009 to be a challenging year again for the stock market. As you know from my column two weeks ago, I see the potential for a low by midyear below the November low, as corporate earnings decline by 10% or more in the face of a global consumption slowdown and price-to-earnings multiples shrink as investors collectively decide to pay less for every unit of earnings.

The Obama transition team has been talking so far about an $800 billion stimulus spread over two years, the largest on record. That would be around $400 billion per year. Yet look at the recent $350 billion that’s been poured into just the banking sector in the past two months by Congress and the Treasury. It may be too early to judge, but most banks are in even worse shape now than when their own private stimulus package was launched. Now just a little more stimulus is going to be spread across the entire economy, and that’s supposed to totally rejuvenate the nation?

My guess is that consumers will have the same response as banks: They’ll hoard most new funds that come their way or pay down debt rather than buy more stuff. Obviously, a lot will leak into the economy, but probably not soon enough to make a huge difference. And meanwhile, consumption growth in the rest of the world, on which our large multinationals depend for earnings growth, will sink.

Bad news, by the numbers

To get more technical, S&P 500 ($INX) companies as a group earned $45.95 a share in the four quarters ending Sept. 30, down $78.60 from a year earlier, and the average price-earnings multiple was 22. If earnings fall 10%, to $41.35, and the P/E multiple slips to 15, as expected, the index will close next year at 620, or 30% below today’s level. That seems like a reasonable forecast, given what we know now.

Now the somewhat scary thing is that even if you are pretty bullish, it’s hard to come up with a target for next year that’s very exciting:

  • Say you figure that earnings will rebound 15% and investors will decide to pay a 20 multiple. That would be $53 in earnings per share, times 20, or 1,060. That level is 19.5% higher than where we are today, which is great, but in terms of time it gets you back only to the start of October.
  • Now say you figure earnings can grow 30% and investors will pay a 21x multiple. That gets you to almost 1,260. This would be a 42% advance but gets you back only to mid-September.

The good news? Sure, why not. Let’s dream a little. If the S&P 500 rises 20% to 40% next year, then the best sectors and market cap groups would rise 40% to 60%-plus. And if a miracle occurs and fiscal spending actually sparks a recovery, I will point you there without fail. Next week, I’ll offer some ideas on what actually could go right and how to plan for it with a small part of your portfolio.

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6 Keys to Protecting Your Portfolio and 6 Stocks for 2009

Two recent articles of note. First, one of my favorites Andrew Horowitz gives us 6 Keys to Protecting Your Portfolio. The 6 keys (A-R-C-H-I-E bunker proof):

A: Always use sell stops to protect your downside risk

R: Remain flexible

C: Call your financial advisers and ask if they employ hedging strategies

H: Heed legislation that will be passed and ask how it may affect you

I: Inherent volatility presents unprecedented risks

E: Ease your worries by learning the lessons

Secondly, a light article from Jack Hough of Smartmoney.com highlighting 6 stocks he sees as poised for a 2009 rebound. The six stocks?

Ticker Company Industry Share
Price
Price
Change
YTD
(%)
Forward
P/E
Yield
(%)
GE General Electric Co. Conglomerates $16.07 -56.65 8.50 7.72
INTC Intel Corp. Semiconductor-Broad Line 14.34 -46.21 12.92 3.91
BA Boeing Co. Aerospace/Defense-Maj Dvd 41.12 -52.98 9.08 4.09
CAT Caterpillar Inc. Farm/Construction Machnry 41.78 -42.42 7.01 4.02
NOC Northrop Grumman Corp. Aerospace/Defense-Prd/Svc 43.15 -45.13 8.31 3.71
HOG Harley-Davidson Inc. Recreational Vehicles 15.83 -66.11 5.19 8.34
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Week Ahead Magazine: July 6, 2014
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Exxon Mobil to profit from the pain

Jubak’s 12/19 article highlights Exxon Mobil’s potential in the coming months and years. Some excerpts:

For the relatively short term — the next five years or so — Exxon Mobil has won its bet. By hoarding its cash, by refusing to pay top dollar for expensive sources of oil and by not getting panicked into projects that made sense only with oil at $120 a barrel, Exxon Mobil is in a position to pick up a bushel of the most attractive pieces that the shakeout in the energy sector will make available over the next 18 months.

Cash in hand of $37 billion. A massive 2.4 billion shares of stock in the treasury. And a collapse in the price of energy company equities around the world.

It sure looks like this is Exxon Mobil’s time, whatever the problems on the production front facing the company 10 years down the road.

Buy Exxon Mobil (XOM, news, msgs): Why buy Exxon Mobil when oil prices are collapsing and as I’m selling oil and gas exploration and production companies such as Devon Energy and Ultra Petroleum? First, because as an integrated oil company, Exxon Mobil makes money refining oil and then selling gasoline and other refined products. That dampens the effect of falling crude oil prices on Exxon Mobil’s revenue and earnings. (The company often makes a bigger refining profit as crude oil prices fall, for example.)

As of Dec. 19, I’m adding shares of Exxon Mobil to Jubak’s Picks with a target price of $91 a share by December 2009.

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The End

The End of Wall Street profiled by the author of Liar’s Poker, Michael Lewis.

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5 Reasons The Fed is Obsolete

Jim Jubak outlines 5 Reasons The Fed is Obsolete in his recent article (summarized below). The 5 reasons hinge on some recent Fed failtures:

The Fed failed to use its power to set margin rates for stock trading in the run-up to the bursting of the 2000 bubble.

The Fed failed to use its power to raise reserve requirements for banks in the run-up to the bursting of the bubble in 2007.

The Fed appears to play favorites. The Fed is supposed to care more about the soundness of the system as a whole than about picking winners and losers.

The Fed let other central banks take the lead on innovative regulation. Contrast the Federal Reserve’s do-nothing approach to the latest financial bubble with the actions taken by the central bank of Spain.

The Fed has become a fixture of the status quo…What this all adds up to in my arithmetic is an institution that talks mostly to itself. Whatever else the Fed may be, it’s surely not a cauldron of new thinking and different points of view.

Opportunity may pass the US by

The new global financial system needs new thinking, but instead we’ve got a Federal Reserve headed by an expert in the Fed’s own history. It’s good that Chairman Ben Bernanke is determined not to repeat the Fed’s mistakes of 1929, but I don’t think being better than the 1929 Fed will give the world the new financial system that we need.

Instead, we’re left with a Fed that is very, very good at the technical details of managing the money supply and the techniques of nontraditional stimulus but is, by reflex, reluctant to take on the financial markets or the big powers that dominate those markets. We’re left with a Federal Reserve that defines its mission very narrowly; it doesn’t even want to use the powers it has.

And it’s a Federal Reserve that isn’t going to give the U.S. the financial markets we need. That’s a huge problem at a time when financial products are one of the most promising areas of U.S. exports. We’re in danger of frittering away a huge competitive advantage because we can’t keep our financial house in anything resembling order.

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Buying a Stock? Read This First

A book review by Andrew Horowitz of The Disciplined Investor profiling Technical Analysis Using Multiple Timeframes by Brian Shannon:

Whether you are looking at technology stocks like Apple or Microsoft,or looking at old favorites like General Electric or Consolidated Edison, there are good times to buy and bad times to sell. After the fundamental analysis is done and you are as confident as you can be that your research is solid, the timing of the buy is critical.

Technical analysis can be an intimidating subject and it is often made more confusing than it needs to be with the addition of some esoteric oscillators and indicators. The goal of every market participant is to make money and when properly understood, technical analysis is a tool which can help you better time investing and trading decisions. Brian Shannon’s new book, Technical Analysis Using Multiple Timeframes focuses on trend recognition and teaches how to spot low risk/ high profit potential opportunities.

Here are 10 useful points from the book:

  1. Understanding the motivations of market participants is more important than memorizing certain technical patterns. There is a constant emphasis on market psychology through out the book which helps the reader attain a deeper understanding of market structure. Once market action is thoroughly understood the participant is in a better position to anticipate rather than react.
  2. Only Price Pays. We all have our biases, but in the end, the market does not value our opinion. It is our job to listen to its message and not let our own opinions get in the way of making money. Objective recognition of trends allows us to put our biases aside and focus on the right ideas at the right times.
  3. Defense wins the game. Risk/money management are constantly emphasized in this book and the breakdown of different stages for stocks allows you to identify when to be long, when to be short and when it makes more sense to be on the sidelines in cash. Cash is sometimes the best position.
  4. Using a minimum of three timeframes to study price action allows the investor/trader to, 1) Identify a candidate based on the primary trend (longer term timeframe), 2) Establish a potential risk/reward scenario (intermediate term) based on potential support and resistance levels and 3) Determine entry and exit levels (short term) based on the trending behavior.
  5. How to recognize specific price behavior which indicates when buyers or sellers are gaining or losing control of the trend. One tip is that moving average crossovers (which are often used as the basis of technical timing systems) actually represent indecision and trend confusion which is a time to raise your defensive guard, not a time to aggressively commit new funds to the market.
  6. A healthy volume pattern will see volume expand in the direction of price movement and then diminish as the stock experiences a short term correction. Big volume without further upside volume equals distribution, while big volume without further downside is a sign of accumulation.
  7. Because the market is a discounting mechanism, fundamental news stories often follow price direction. Fundamental analysis cannot be ignored by anyone serious about making money in the markets, but it is the market reaction to the news that matters most, not your interpretation of the headline. Fundamental “news” is only as good as its source and as we well know news and truth are often confused on Wall Street. News stories can are reacted to by; establishing a new trend, accelerating and existing trend, reversing a trends or just fizzling out.
  8. The Volume Weighted Average Price (VWAP) is the average price a stock (or market) has traded at over a given time. The VWAP is the basis for many of the algorithmic trades that are executed each day. Brian gives a thorough description of how this price affects behavior on a daily basis.
  9. Short squeezes can create powerful trend trading opportunities. By combining short interest figures (which are released to the public every two weeks) with average price information, it is possible to determine the approximate level where short positions were initiated. As the average short position begins to lose money, the odds increase for capitulative purchases to cover the shorts which can lead to dramatic upward price moves.
  10. Success in the markets is attained by understanding your own personal psychology, the psychology of the “herd” (as represented by price behavior), and finding the trading vehicles and timeframe which suits your personality best.

You can pick up a copy of this book HERE

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Smart Money: Where to Invest 2009

Smartmoney.com’s “Where to Invest 2009″ profiles their stock picks for 2009:

Safe Harbors
: DUK, SO, MSFT, JNJ

A Little Volatile
: MHS, XRAY, AAPL, CSCO

Higher Risk and Return
: NLY, LOW, RIG, GE

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SEC Ignored Madoff Complaint in 2005

Yuck, is there any way we could find a way to jail the SEC’s chairman Christopher Cox for crimes against humanity and the economy??!

Here is a detailed complaint in 2005 to the SEC detailing Madoff’s hedge fund as a scam. Meanwhile, Cox was busy dismantling the SEC.

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Increase Your Odds With Multiple Time Frame Analysis

A good article by Brian Shannon of alphatrends.net for those looking to get into trading or as a reminder for more experienced investors:

Two or more time frames are better than one when it comes to technical analysis. Here’s how to make the most of time frames.

We have all heard the market cliché “the trend is your friend” and for good reason. Making big money in the markets is accomplished by entering a position at the onset of a new trend and then having the patience to hold the position long enough to allow the profit to accumulate into a large winner. Participation in a long-term trend is the dream of every investor. To have a huge winner that we believed in and held well beyond the point where most participants would have been shaken out on a short- term pullbacks is what allows successful investors to reap large gains.

Many investors may find their most satisfying winners in a three-year hold. But that time frame does not fit all market participants. There are those of us who believe that long-term capital gains should be recognized after just a few days. For those traders, three years seems like a lifetime! Short-term trading can produce outsized returns, as long as losers are properly managed and winners are larger than the losers (but then again, that is true for any time frame).

Don’t Fight the Tide
In order to attain larger winners than losers, the easiest way to get the odds in your favor is to trade with the primary trend, regardless of whether you are an investor or a trader. Think of the most basic definition of an uptrend, which is price making “higher highs and higher lows.” In an uptrend, the sum of the rallies will always be greater than the sum of the declines; otherwise the trend would not be intact. The opposite is true for a downtrend; the sum of the declines will always be greater than the sum of the rallies, which obviously makes the short side more profitable in a down-trending stock. The simple math of trends is the biggest argument for why it makes sense to participate in moves that are aligned with the direction of the primary trend, rather than trying to pick tops and bottoms. Even if one can accurately predict turning points in a market, the reward will not be as great as it would be if one were participating in the trend.

A Market Can “Correct” in Two Ways
The way that markets correct is another factor that stacks the odds against those who attempt to profit by trading against the trend. For those who are beginning technical traders, there are two ways markets can correct after a move in either direction.

The first type of correction is one that occurs by price. For example, an up-trending market will experience a pullback in price, or a down-trending stock will experience a short-term rally before the primary trend re-exerts its dominance. The other way a market corrects is through time, meaning that instead of a countertrend move, the market will trade sideways as the buyers and sellers battle it out for control. A correction through time is typically marked by low volatility in a tight range, which can frustrate the person anticipating a reversal. Because numerous trends are often prevalent in a given market, the surest way to stack the odds in your favor is to use multiple time-frame analysis for trend alignment, before risking your capital.

In theory, trend trading is simple: Buy low and sell high for longs, and sell high and buy back low for short positions. In reality, many traders find trend trading frustrating because they are not focusing on the right trend. A little over one hundred years ago, Charles H. Dow wrote a series of editorials in The Wall Street Journal in which he laid out his views of how the stock market works; collectively these writings are referred to as “The Dow Theory.” The work of Dow is still referred to today and is the underlying premise of technical analysis.

Three Types of Trends
One of the foundations of the Dow theory is the identification of three types of price trends: the primary trend, the secondary trend and minor trends. The primary movements were compared to oceanic tides. They are the main trend of the market whose duration can last from a few months to several years. Primary trends cannot be manipulated, as the forces of supply and demand are too large for any one participant to successfully influence the collective reasoning of the crowd. Secondary movements were referred to as waves and they are known as reactionary moves, trends that typically last from two weeks to three months. The secondary movements are often created by a large participant (mutual fund, hedge fund, etc.) exiting all or a significant part of their position; once that supply (in an uptrend) is absorbed by the market, the buyers regain control and the stock continues higher in the primary trend. Finally, minor (or short-term) trends were viewed as insignificant ripples, which lasted less than two weeks and were given little significance because they represent fluctuations in the secondary trend. The short-term ripples in the market can be difficult to predict because they are often driven by emotions. However, skilled day traders thrive on this type of emotional short-term movement.

Pick Your Trend
One of the most important elements in successful trend trading is to determine which trend to focus on. Deciding which time frame to engage the market is largely determined by individual factors. These include time available to commit to the markets, capital base, experience level, risk tolerance and even one’s level of patience. Investors are naturally attracted to the primary movement, while the secondary moves are going to be the focus of a more intermediate-term participant (swing traders). And, the minor trends will be the obvious choice of day traders. Even as simple as that concept may seem, it becomes more complicated because technical analysis is about timing, and you must look at more than one time frame if you are truly to have the odds in your favor.

In order to make timing decisions that will allow you to determine a low-risk area to get involved and still have large profit potential, it is essential to conduct your analysis on multiple time frames. We will now explore three different time frames that investors, swing traders and day traders should look at. To make this analysis real we will use an example of a current setup in the market as if we were going to enter an investment or a swing trade. Because of the short-term nature of a day trade we will outline the time frames to consider but will not study an actual trade setup (see Table 1).


click image for larger view

Whether you are an investor, swing trader or day trader, the first time frame that should be studied is one that represents the primary trend. The longer, more powerful trends are the ones that you want to be sure not to fight, as mistakes can be quite costly. The long-term time frame is not about timing, it is about idea generation. For an investor, the time frame to start with is a weekly chart that encompasses at least two years worth of data. Looking at Figure 1, the weekly chart of Stats Chippac Ltd. (STTS) shows the stock has been bottoming out over the last 18 months. The recent increased volume suggests the stock may be ready for a sustained move higher that could see the stock trade near the 10-level. This is the type of chart that should get an investor interested in further study on shorter time frames (of course having a fundamental reason for being involved, in this case increased earnings and revenues, is always a bonus.)


click image for larger view

The primary trend for a swing trader will not be quite as long term as it would be for an investor; this is why the swing trader’s analysis of a long-term trend should take place on a daily chart, which shows at least 150 days of data. A swing trader would have good reason for being bullish on the daily trend of STTS as the stock is in a strong up trend, which is defined by a strong volume pattern and the stock holding above rising key moving averages (see Figure 2). It is also very encouraging to bullish traders that the stock found support at the prior level of resistance near $7.20 on a recent low-volume pullback.


click image for larger view

Drilling Down
Day traders will find it necessary to bring their analysis of a long-term trend to an even shorter period of time. That can be accomplished by studying price action on a 60-minute chart, which shows price movement over at least 25 days. The 60-minute chart of STTS (see Figure 3) is telling day traders a similarly bullish message as was seen on the weekly and daily time frames. The 60-minute time frame shows that the buyers have once again taken control of the stock by pushing past the short-term resistance at $7.30. Notice how this action has also turned the moving averages higher; confirming that the short, intermediate and longer-term trends of this time frame are now higher.


click image for larger view

Look Left
The units of time studied in these examples are starting points. It is often necessary to look “further to the left” to see older data that may be relevant to the primary trend. The goal of the long-term time frame is to allow the participant to recognize signs of a new trend or a stock that appears to be early on in an established trend, and then move to a shorter time frame for further confirmation of a reason to get involved in an actual trade.

Once the stock has been identified as a viable candidate for a commitment of capital, the next step is to determine key levels of support and resistance, which brings our analysis to the secondary time frame. A trader must first identify the existence of a primary trend, using the appropriate longer-term time frame. The next step for a trade set-up is to determine if there is sufficient potential for reward relative to the perceived risk, essentially this is where we plan our trade. The evaluation of the risk/ reward scenario should take place on an intermediate term time frame that allows for easier recognition of levels of support and resistance, which might not have been visible on the longer-term Time fram.

To view the secondary trend, an investor would study the action on the daily Time fram of STTS (Figure 2). On the daily chart, the investor should notice that the stock recently rallied from 7.00 to 7.60 on heavy volume and then experienced a lower volume pullback to previous resistance at 7.20. At this point, it appears the 7.2 level is where there should be good support for the stock, but the investor may want to set a stop under the rising 20-day moving average (MA) which is now at approximately 7.10, this would give the investor a theoretical risk of approximately $0.40. Setting the stop under the 20-day MA instead of under the support at 7.20 exposes the trade to more risk, but it also reduces the chance of getting stopped out of the position prematurely.

Coming up with an upward price objective could not be done on the daily time frame because of the limited price action above 7.00, so the investor would have to revert back to the weekly time frame (Figure 1) to come up with an initial target near 8.20, which is the high for the stock in 2004. Because the stock had limited trading history at the 8.20 level it is unlikely that the resistance would be very strong, thus making a target closer to 10.00 more feasible. Even the 10.00 level could prove to be conservative as there is further potential for the stock to rally up towards 12.00 which was a support level broken in late 2003. Whether the stock eventually rallies up towards ten or twelve, the risk of getting involved with a stop of just $.40 makes this a very attractive long side candidate.

Finding Support and Resistance
After identifying STTS as a good potential swing trade candidate on a daily time frame, the intermediate-term trader would then drill down the analysis of support and resistance by looking at the hourly time frame (Figure 3). The way a swing trader should interpret the action seen on the hourly chart is that the stock is in an ideal area for purchase as the buyers have just regained control of the trend on this time frame. By clearing the short-term resistance at 7.30, the buyers are back in control of the intermediate-term trend, and the stock now has strong upward momentum, making it an excellent candidate for a swing trade. The minimum upward objective for the swing trade would be the recent highs of 8.20 and determination of where to set the stop would come from an examination of the minor trend, which can be seen in Figure 4.


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The final time frame to be studied is the minor trend. The goal on this time frame is to capture a more accurate entry price. The minor trend for the investor is found in Figure 3, the hourly time frame. If the investor is looking to enter the stock while it exhibits upward strength, he may choose to enter at the same level the swing trader was targeting at, 7.30.

A swing trader should analyze the short-term trend by studying price action on a ten-minute chart, which covers ten days of trading activity. As we saw on the 60-minute chart, the ideal purchase would have occurred as the buyers gained control of the short-term trend when they pushed the stock past short-term resistance at $7.30; the ten-minute time frame shows this level in greater detail. While the ten-minute time frame does not offer any particular advantage over the 60-minute time frame in the case of STTS, it does often provide greater detail that allows us to fine tune not only our entry price but also where to place our initial protective stop.

Multiple Time frame Analysis Can Help
The concept of using multiple time frames for trading is one every market participant should consider because it allows for a greater level of objective analysis of what the market is actually doing, rather than relying on our opinions to make important trading decisions. Using three different time frames allows market participants in all time frames to find the idea (primary trend), create a plan of action (secondary trend), and capture more accurate entries (minor trend). In the end, multiple time frames allow us to become better at holding our winners and cutting our losers, a goal common to all market participants.

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