Okay, let's put it all together on Multiple Time Frames and create a real nice technical overview of the Dow Jones Industrial Average (or whatever other index, stock, currency, bond, etc., that you like) with the TA "basics" that I've presented to you in this short series of "Let's Talk" articles.
Multiple Time Frame analysis is exactly what it sounds like: technical analysis on various time frames. The fundamental idea behind multiple time frame analysis is to avoid getting crushed by larger trends, levels, momentum and patterns (I put that in the negative since capital preservation is rule number one in this business). To give you an idea, let's suppose that you've used all these basic TA tools in your own analysis and have determined that you have what you consider to be a low risk, high reward, long setup on the daily time frame, but that you then get your head handed to you because the weekly was still pressing for a capitulation low before reversing. The larger time frame ran over you like a freight train because you hadn't included it in your analysis and hadn't given it the priority it deserves.
There are many ways of dealing with discrepancies on the various time frames, one of which is to never trade against the larger trend and greater momentum on the next higher time frame, for example. For active traders who are going to take the trade anyway, the use of that information to clearly manage the trade as a countertrend trade is clearly advantageous. That's for another day though, since in-so-far as this article is concerned, I'll be limiting things exclusively to a multiple time frame TA introduction, once again using the Dow Jones as our example index.
INDU Monthly TA
Let's get started by analyzing the Dow monthly chart. First the chart, and then a summary breakdown.
- Trends: Established and entrenched, price validated, multi-decade uptrend channeling along with long term Raff Regression Channeling, primary and intermediate term uptrends and positively aligned and uptrending long term moving averages all set the bullish undertone.
- Support and Resistance: Long term market structure is further strengthened by higher highs and higher lows since 2009 with each higher low backtesting and validating each S/R level from the 9800 zone, to 11,000, to 12,500ish, giving additional importance to the major support between ~10,000 and ~11,000 created in large part by the 1999-2002 and 2004-2006 consolidation zones and also confirmed by Volume by Price as well as price pattern development over time (see Let's Talk Levels for a complete overview). The 2009 low is set apart by a huge volume spike as the smart money took on everything panic sellers had to throw at them.
- Momentum: CCI and MACD have made new highs relative to their longer term prior highs, and the RSI has made a new high relative to recent highs on this rally from 2009 but still hasn't exceed its 2007 reading. After coming off healthy bullish swing failures backtesting the key major support at 11,000 in 2011, the Wm%R and Full STO have been clearly embedded in overbought demonstrating the strength and tenaciousness of the primary rising trend since 2009.
- Patterns: As highlighted in detail in Let's Talk Patterns, the long term intermediate price pattern picture is one of major intermediate patterns defining a major range between 7500 and 11,000. Since 2009 all intermediate patterns have worked to propel price higher including the most recent rising wedge (which is so large as to almost be classified as a long term pattern) which may be in an overthrow process. Bullish candlesticks have also validated each backtest of support as well (2009 low, 2010 lows, 2011 lows and the 12,500 level twice in 2012).
- Trends: From a channeling and basic trend point of view, price has accelerated and overthrown above both dominate very long term and long term active channels, and has approached the upper limits of the primary trend channel off the 2009 lows. The overextended state of the current valuation of the Dow is such that price is over 2.5 standard deviations above the 200 month moving average as defined by the Bollinger Bands, has recently hit a 2.5 SD above the 100 month MA, and is very close to doing the same with the 50 month MA. You can also get a very good visual idea as to the current overextended nature of price relative to historical pricing by focusing on the distance between the shorter term, steeply rising exponential moving averages and those longer term moving averages.
- Support and Resistance: As can be readily seen on the chart, price has also dramatically extended well above all major long term support with 14,198.10 being first horizontal price support extending from the 2007 price high.
- Momentum: The ROC, RSI and MACD Histogram show important Class A Bearish Divergences with respect to price, with the RSI diverging over the entire course of the three price highs, all of which is within a historical context of cyclical rollovers and a succession of indicator lower lows, which often signal impending new lower lows in price. Overall these readings represent a tiring long term trend which is confirmed by a long term downtrend in the ADX. The Full STO exhibits a pattern beginning in 2002 and 2003 that consists in a major rally followed by a sell down into its centerline that turned into a bullish swing failure from which price rallied a second time until the 2007 and 2008 rollover into a dramatic decline. The same thing has happened since 2009, except for the final rollover, and the question now is if that might play out once again.
- Patterns: Perhaps the most ominous aspect of this chart in my opinion is the multi-year broadening formation (drawn in red) in combination with an intermediate term rising wedge overthrow that has led price up into its upper limits.
Overall the monthly time frame manifests mature long term uptrends combined with a strong intermediate term uptrend up above an extremely strong area of long term horizontal support at the top of a well defined multi-year range between 7500 and 11,000 (excluding overshoot extremes). Momentum indicators confirm this long term rising bias, but with indications of tiredness that, when combined with extreme deviations of price above longer term sustainable trend levels, could well be signaling that, longer term, price may want to take a rest. The idea that price may be reaching an exhaustion point prior to an intermediate term reaction is confirmed by the combination of an intermediate term rising wedge whose overthrow has reached the upper limits of a multi-year broadening pattern and that multi-year broadening pattern itself. While it's true that broadening patterns can fall all the way back to their lower limits, with huge long term uptrend and horizontal support coming in between 8500 and 12,000, I see that as a low probability scenario if and when price does start to seriously backtest long term support levels. That having been said, I should also be clear in saying that downside target discussions are premature at this stage in my opinion, and that the focus should be on where price currently finds itself on this time frame: at rising wedge overthrow target levels and standard deviation extremes above long term trend levels that coincide with a major multi-year broadening formation's upper resistance levels, and all this is coupled with evident signs of most recent primary trend upside momentum running low on gas and longer term momentum having shown signs of one or more cylinders missing from time to time in periodic panics leading to successive lower lows on the momentum indicators.
INDU Weekly TA
Moving to the weekly time frame we have the following.
- Trends: As also seen on the monthly chart, the weekly gives us a close up on very long term ascending channel support, primary rising trend channeling from the 2009 lows, and intermediate term rising trendline support extending from the rising wedge's lower boundary, all validated by price action. Long term weekly MA's are positively aligned and sloping up. Short term EMA's are also positively aligned and turning higher after having briefly paused.
- Support and Resistance: Short term horizontal price support between 14,400 and 14,850 established in the May-April consolidation coincides with 61.6%-50%-38.2% Fibonacci retracement levels between the last two swing highs.
- Momentum: The RSI and MACD reflect strong primary trend conditions and confirm the primary rising channel. Coiling (triangulating) conditions across the momentum indicators confirm the rising wedge and breakout higher, and continue to maintain unbroken uptrends. The most recent event of notable significance is the bullish swing failure on the recent sell-off down into the most recent swing low at confluence of support.
- Patterns: Price patterns confirm the upward bias since 2009 starting with the inverse head and shoulders at the 2009 lows. A failed H&S built from late 2009 to mid-2010 failed and its right shoulder eventually turned into another IH&S that was confirmed by a clustering of bullish candlesticks (that was also a major retest/confirmation of the 10,000 S/R level) that went to target where yet another H&S formed, also confirmed by a candlestick cluster - this time bearish - and marking the beginning of the rising wedge. After that we see that a double bottom formed at the H&S target, marking the beginning of the lower boundary of the rising wedge, also with candlestick confirmatory clustering, followed by a double top with a bearish candlestick cluster, then a cup and handle and a bullish candlestick cluster, then a double top with a bearish candlestick cluster, a failed rising wedge breakdown, a cup and handle recovery, and, finally, a break higher into an IT accelerated uptrend marked by a couple of flags and their subsequent breakouts higher. (For more on the candlestick clusterings, see Let's Talk Candlesticks.)
- Trends: The primary trend shows few signs of weakness on this time frame. Of concern are the recent high readings on the ADX which could indicate frothy conditions when coming at quite a mature stage of a trend, something that price extremes above longer term sustainable trends also corroborate, much as they also do on the monthly chart.
- Support and Resistance: Price is closer to resistance than support, and it's MAJOR resistance in CAPS, while immediate support is minor. It's my opinion that the major broadening pattern upper limits represent the most important resistance to watch, with the upper limits of rising channels coming in a close second.
- Momentum: Minor IT Class A bearish divergences on the ROC and MACD Histogram along with the same on a very short term basis on the CCI and RSI would tend to confirm the thesis that the ADX might be more likely than not giving us yet another indication of end-of-trend euphoria rather than beginning-of-trend kickoff strength.
- Patterns: The most recent sell-off saw a couple of important bearish candlestick patterns (that were completely erased by a kind of bullish engulfing morning star pattern off of confluence of support however).
The weekly time frame looks to be on balance bullish, with few signs of weakness that would serve to help keep us from falling asleep at the wheel. In the absence of important bearish divergences and the presence of only a few minor bearish divergences, the tendency might be to lower one's guard and resign oneself to the expectation of continued higher prices, but that would not be a good idea in my opinion. I did a 30 year study on divergences on the daily and weekly time frames on the SPX a while back whose main conclusion was that the larger time frame's character almost always overpowers the shorter term when it comes to divergences: a divergence on the larger time frame usually leads to a corrective reaction on that particular time frame which ultimately looks much bigger and much less corrective on the shorter time frame, surprising those who had given greater importance to the shorter term time frame. Price is also at overbought extremes and bumping up against major overhead resistance and has limited support in close proximity. Market structure is well defined by major price pattern and price consolidation zones that have worked together to form the larger IT rising wedge whose upper limit and breakout level at ~13,800 marks important support on this time frame that coincides with the lower end of a confluence of support zone that extends up to ~14,200 (very long term upper channel, 50 week MA, lower Bollinger, and 2007 price high) representing the first important downside S/R zone for future backtesting.
INDU Daily TA
The daily time frame is where this particular example of multiple time frame analysis would be looking for trading signals for entry and exit points.
- Trends: So as to not belabor what's already been said more than once about the longer term uptrends and channeling, let me just say that the channel and trend draws on the chart are self-evident and simply serve to reiterate what the longer term time frames demonstrate. The intermediate and shorter term trends have accelerated - something that's usually associated with either end-of-trend euphoria or early trend breakouts - and the dominant "line in the sand" is clearly rooted in the preceding rising wedge (unmistakable on this time frame).
- Support and Resistance: Short term support in the form of a rather steeply rising 100 DMA and lower Bollinger lend additional support to the weekly confluence of support at the same level.
- Momentum: In Let's Talk Momentum, I mentioned that I thought that the most important hurdle the bulls had facing them at that time was the possibility of a bearish swing failure. Well, it's quite obvious from the daily chart that they easily cleared that hurdle, then broke reaction downtrends, and have now even taken the momentum oscillators into overbought.
- Patterns: Here we clearly see those flags I mentioned on the weekly, in the obvious stair stepped climb higher from the beginning of the year. The most recent V bottom (or cup and handle as could be argued) reversal off confluence of support was made up of three white soldiers, a kind of falling three method consolidation with an inverted hammer in the middle, and another series of three white soldiers clustering of bullish candlesticks.
- Trends: As with the higher time frames previously discussed, price has reached extremes in terms of distance above the longer term more sustainable rates of ascent. Here, as on the weekly and monthly charts, we see this obvious shorter term stretching of price away from longer term trends in most simple and visible terms in the distance that the shorter term EMA's are above the longer term SMA's and how price is bumping up into the upper 2 SD 21 day Bollinger band. As with the monthly and weekly time frames, price has been moving in the 200 period moving average 2.5 standard deviation upper band zone as well. While the intermediate term trend acceleration up into price extremes is evident on all time frames, it is the daily where we see the first break in that IT acceleration (see Let's Talk Trends for the initial setup on that).
- Support and Resistance: Long term resistance is the same as already mentioned on the longer time frames. One word: MAJOR!
- Momentum: The momentum indicators all recently made significant new lower lows with respect to their recent intra-cycle lows, something which often points to new lower lows in price. The ADX continues in an overall intermediate term downtrend indicating a slowing in the upward trend. As price moves to new highs, all eyes should be on the lookout for a possible new high with bearish divergences developing once again on the momentum indicators similar to what took place at the last daily swing high.
- Patterns: We recently saw a double top at first major resistance that went to target, a subsequent ascending triangle breakdown, also to target, with the entire reaction also being comprised of a clustering of bearish candlesticks on the daily time frame: long upper wicked sticks at the double top, evening star in the middle of the ascending triangle, and 2 long red bearish engulfing sticks on the breakdown. Currently, there is a possibility of an intermediate term double top forming on the daily, but apart from that speculation, the operative patterns of importance from a bearish standpoint are those I've already discussed on the larger time frames, that is to say, the multi-year broadening pattern and the IT rising wedge leading price up into its upper resistance zone.
The intermediate trend has accentuated the longer term bullish trends by accelerating and moving price to extreme deviations above those longer term bullish trends and up into long term rising channel upper limits and multi-year price pattern resistance putting what looks like a nice stamp of approval on the euphoric, end-of-trend thesis. The short term trend coming off the most recent swing low has accelerated even more, but the momentum indicators are warning of a waning in momentum that's likely to manifest itself with bearish divergences at the next swing high similar to what happened at the last swing high. Short term pattern recognition is giving us a basically neutral signal, but the intermediate term (i.e. rising wedge) and the long term (i.e. broadening) patterns clearly take on overriding precedence and are obviously the key patterns in play in my opinion on this and all time frames.
The multi-year broadening pattern (also called an "expanding wedge" or, in more recent times, a "megaphone" by some) and the intermediate term rising wedge dominate all time frames, as do the very well established long and intermediate term trends and the horizontal S/R levels constructed by price patterns and confirmed by volume. Momentum is the principal variable within various time frames, with the smaller trends, levels, and patterns clearly coming into play the more we "zoom in", but obviously losing comparative importance the shorter the time frame becomes in our journey towards a tick by tick analysis. Momentum in this particular case on the Dow suggests that the very long and long term trends are quite mature and slowing - in fact, the major momentum lows in 2002-2003 and 2008-2009 might even give us reason to think that the wheels might be ready to come off the bus. More recently, IT momentum has also been showing particular signs of tiredness relative to the historical spectrum, and when combined with the fact that price has reached extreme deviations above longer term trend levels on all time frames, that's a big issue, and more so when we factor in the rising wedge overthrow up into major broadening pattern resistance which in and of itself is possible confirmation of a cap to those long term trends and momentum. As is easily appreciated on all time frames, but most clearly on the daily, the IT trend has even accelerated over the last several months as it has pushed price up into that major resistance and those extreme deviations. This is the equivalent of running a race car over redline in the last minutes of the race - you run the risk of throwing a rod - and while the weekly shows little signs of weakness, the daily is more in agreement with the monthly in showing signs of overheating in a possible terminal phase. The recent swing high on the daily was setup with bearish divergences, and it looks like the same thing has a good chance of setting up once again, and this time on an accelerated trend with an angle of ascent that is even steeper than before! Price on the daily is blasting off, challenging, or breaking to new highs, and doing so with relatively sound market structure of moving higher, backtesting and consolidating, and then putting in another leg higher. If the only thing you were looking at was the daily time frame and you weren't too worried about the caution flags on that very same time frame, you might be gung ho about going "all in", but that would be a big mistake in my opinion that I'm sure you'd agree with once you backed up and put those upper Bollingers, upper channel limits, and big broadening pattern upper resistance on your chart in recognition of their long term importance, and then you also analyzed and included longer and shorter term momentum with that, and long term price patterns, and put that intermediate term rising wedge into context, etc., etc., etc. In short, once you go beyond the short term and take into account everything we've gone over in this write up, and those leading up to it, I'd even venture to say that you might even come to the opposite conclusion: that instead of it being a buying opportunity, it just might be one of the most important selling opportunities of our lifetimes . . . and that the buying opportunity might be more like something down around 11,000 or so.
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