The charts are a mess.
The steep decline in the stock market so far this year has caused a lot of technical damage to all the indexes and most stocks.[ad#Google Adsense 336×280-IA]It’s going to take several weeks of back-and-forth, choppy action to give stocks a chance to settle down and offer any sort of tradable pattern.
As a trader, you have two choices: You can take the next few weeks off, let the dust settle, and give up any chance of profiting in a choppy, volatile environment…
Or you can “zoom in” and maybe make huge profits over the next few weeks.
Let me explain…
Last summer, I shared a few of my favorite trading patterns here and here. None of those patterns exist right now on the daily charts of any of the major stock market indexes or on most individual stocks.
Take a look at this daily chart of the S&P 500 (as of last Friday)…
There’s no short-term pattern here. There’s no way to play “connect the dots” and draw support and resistance lines. There’s no way to determine risk and reward. That means there’s no way to trade off this chart.
But if we zoom in to a shorter-term time frame, the picture is a bit clearer. Take a look at this 60-minute chart of the S&P 500…
Using this view, we can see down-trending resistance connecting all of the lower highs on the chart. We can also see that the S&P 500 broke above this resistance line late last week. That line will now serve as support on any move lower.
We can’t draw a new resistance line until the current bounce plays out and the index starts to move lower again. But at least we know where support is. Traders have a lower-risk entry point if the index moves back down toward the blue line.
If we zoom in further to a 15-minute chart, we see an even more tradable setup…
On this chart, we can see a bearish rising-wedge pattern, with negative divergence on the moving average convergence divergence (MACD) momentum indicator. These patterns most often lead to a break to the downside.
Traders can now look to short the index on any move up toward the resistance line of the pattern (the top of the wedge), or if it breaks down below the support line. Then we can look to cover the trade – and even go long – as the S&P 500 falls toward the support line on the 60-minute chart above.
This is just an illustration of how zooming in and looking at a shorter time frame on the charts can give us a better picture of what’s happening in the markets… and give us more trading opportunities.
If the stock market is transitioning from bullish to bearish, the volatile, choppy action we’ve seen over the past month is going to persist for several more months (at least). The daily charts won’t do us much good. Learning to trade off the intraday movement in stocks will give you a good chance to profit.
Best regards and good trading,
Source: Growth Stock Wire