Keeping to the Bigger Picture!

With all the media hype in our faces on a daily basis it’s close to impossible to completely shut off the radar to outside influences. That being said, we need to ensure we base our views on what is occurring as opposed to what we hope will occur.

The last 6 months have provided some solace to the investors who were battered and bruised in 2007/2008. One way that I use to ensure I act on what’s in front of me - as opposed to emotion - is to keep a clear eye on the trends on all time frames - 1,2,3 day and weekly as well as use the bigger picture as a tool to understand how strong those trends are.

In looking at the SPI and Crude Oil we can use the same techniques to test the theory and help us bias our trades in the right direction. The first step is to accurately determine the trend on the above mentioned time frames and see if they are in sympathy or disagreement.

We can see the SPI 200 is predominately up with the 3 day trend uncertain. This would allow us to form the view that the major and minor trends are up so in keeping with that trend we are likely to be trading to the long side unless we had strong time and price reasons for doing so.

The Crude oil market is also showing 3 of the 4 trends as being up with the 2 day trend confirmed as down. This could add some caution in entering any trade to the upside and waiting for a confirmation of other trends being down could confirm its time to be short.

This alone is not enough to enter trades, now its time to look at the bigger picture and I am thinking of resistance cards and the most simple is a ranges resistance card. This takes into consideration tops and bottoms and we can find the most significant ones by taking a quick check of the chart. If we looked at the SPI 200 we would look at the 6880 high in 2007 and the 3111 low made in 2009.

In chart 1 we see the important percentages that could act as support and resistance. On the way out of the low the 25% and 37.5% have acted as short term resistance and broken higher. This could mean that with all trends up, or uncertain, we could be pushing to the critical 50% level for a test of how strong this market really is. If we do fail to push higher, the 25% level that was resistance could potentially act as support.

Chart 1 – Weekly Bar Chart SPI 200

click chart to enlarge

The crude market can be analyzed the same way and combined with a trend perspective. In chart 2 we see the areas that have acted as support at the 12.5% and 25% with the 37.5% now acting as some resistance. With the trends showing mainly up on crude, if we see a break out above the 37.5% point a target of just under $90 may be on the cards. If weakness continues then a retreat to around $61 could be a support point.

Chart 2 – Weekly Bar Chart Crude Oil

click chart to enlarge

So how do we know which target is the way the market will go? Well by watching your swing charts across all time frames you can bias your trades the way the market is travelling. It’s important to realize that the broader time frames, like 3 day and weekly, are slow to turn so that’s why trading off a 1 day chart gives you a more sensitive indicator to trade.

Support and resistance combined with trend determination is a key skill to get your trades the right way in terms of direction and also where they may run to. By getting this into a routine and sticking to it this will become a process that can be used to gain confidence in selecting trades in the market when referenced back to the ABC method.

The remainder of the year will provide some great opportunities for profit, I am not sold that this market can run forever, but that does not mean the great depression is coming either. I will be watching the trends closely and will act accordingly if support or resistance is broken.

Good Trading

Aaron Lynch