The red arrows above highlight the most recent downturn in stocks, coming off of the April-May intermediate high. We could have used a variety of momentum indicators in combination with technical analysis of support and resistance points, an analysis of trend-lines, moving averages, as well as viewing inter-market correlations and macro economic data to help us identify the 'validity' of price action at the April-May top. But, I want to look at this latest downswing in stocks (May-June 11') by examining the hierarchy of integrated trading time frames as an alternative method to directional/momentum trading.
Let's have a closer look at the chart below, which isolates the weekly trading time frame as a channel overlay on the day bars, reflecting the markets' activity on a weekly basis. We now have insight about how the day bars are 'behaving' within the context of the important weekly time frame. This weekly channel acts as a guide for the more important intermediate-term market conditions.
The blue arrows (above) identify the range of the weekly channel boundary and the consecutive red arrows denote specific day bars that violate the channel boundary to the downside. We can see from the illustration of red arrows that each successive violation of the weekly channel creates a trending condition on the weekly time frame, as the weekly boundary overlay 'steps down' through time from April to June. More importantly, we can observe that as the weekly 'trending' condition is set in motion, the days bars behave 'logically' and 'coherently' by respecting the weekly time boundaries, sustaining the weekly trending condition further to the downside.
In the chart above, I have focused on trading activity within the most recent trading week (06/20-06/24). The red arrow identifies the most recent day bar that violated the weekly channel to the downside, resulting in a continuation of the 'weekly' trend. Notice in the past week that the day bars have been very active and energized within the current weekly time structure, illustrated by the blue arrows. What is important to recognize from this activity is that the day time frame was unable to violate the weekly channel upper boundary (indicated by the upper blue arrow). Infact, the most recent 4 trading days (06/24, 06/23, 06/22, 06/21) failed at the upper weekly boundary, proving that the weekly down trend remains intact and is valid directionally speaking.
It would take a closing violation of the upper channel on a weekly basis to confirm that the current down trend has ended.
The last chart below adds the monthly time frame into the mix, as defined by the maroon channel overlay. This channel is defined by the range of trading activity on a monthly basis and is in effect a larger barometer of trading behavior, and is therefore more meaningful and impactful to the prevailing directional bias. We can see that the current trading activity in the month of June 11' has violated the lower monthly boundary as it continues to trade below the current maroon channel, defined by the activity in the month of May 11'. Just as the day bars violated the weekly channel boundaries setting the weekly directional down trend in motion, so to is the monthly directional trend at risk of reversing to the downside if the market closes below this all important lower maroon channel boundary in June 11'.
Next time I will show you how we can use the hourly time structure as our leading indicator and time frame to develop trading strategies both long and short within the context of the weekly and monthly time frames.
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