Different Timeframes, Different Levels

February 6, 2020

From the desk of Tom Bruni @BruniCharting

We often get questions about what levels we're watching or what our stop is, but in truth every market participant has different timeframes, objectives, and plans for how they'll manage their portfolios. It's impossible to answer properly without knowing all of that information.

With that being said, any market participant can identify various levels at which the dynamics of the asset they're trading have changed.

Today I want to walk through an example using the Japan ETF (EWJ) showing how we'd go about identifying those changes through price action and momentum.

First, let's take a look at the very tactical picture. Prices had been advancing since late August, making higher highs and higher lows, however, in mid-December prices broke back below their previous high of 60.20 as momentum diverged negatively. That was the first "shot across the bow" that gave short-term traders an opportunity to adjust.

Click on chart to enlarge view.

The next clue was that in the weeks following that failed breakout prices were unable to get back above resistance near 60.20, signaling that sellers were still in control and that downside risk remained elevated.

Next was the break of 59.00 to new 3-month lows. If you were in it from a swing perspective and held throughout the consolidation to see which way it resolved, you got your answer here.

And here we are today...a hot mess as prices get back above 59 but remain stuck below 60.20. In other words, the short and intermediate-term trends are now sideways.

But what about structurally? What if you've got a longer-term timeframe?

Well, the 56.00-56.50 breakout level that confirmed its long-term bearish to bullish trend reversal is what matters. As long as prices are above that level then buyers remain in control from a long-term perspective.

The point here is that no matter your timeframe or who you are as a market participant, recognizing subtle shifts in price action and momentum can help navigate seemingly random shifts in the trend of a security. The problem is, many forget their plan when price starts moving and end up making changes to their position that don't align with their objectives.

By identifying the levels and circumstances at which your thesis is no longer valid before entering the trade, you can filter through the noise and identify which "shifts" in trend are relevant to you and your position.

If you enjoyed this post and want more educational content, check out our post from last week on Equal-Weighted Index underperformance and the High Dividend Factor ETF (HDV).

Thanks for reading and please let us know if you have any questions!

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Allstarcharts Team