Altos Trading Articles

How You Can Use Different Timeframes to Confirm a New Trend, Before Risking Any Investment Capital

Originally Posted: June 6, 2022

June 6, 2022:

Today we’re going to focus on confirming trends of momentum on longer time frames.

Here at Altos, and in my own personal trading, we do a lot of focus on the Daily Timeframe charts.

But in volatile times when the market gyrates like John Travolta in Saturday night fever – the key is to use higher time frames like the Weekly and Monthly.

So if you think a stock might be heading up or down, you can confirm the turn of momentum before risking any of your money.

In a moment, we'll talk about how the Daily, Weekly, and Monthly charts can work together, and you’ll see how it can help you start trading with more confidence.

First let’s go over our Daily charts, starting with the S&P 500…

Right now, we’re seeing a small rebound, but there’s a lot of consolidation and sideways price action.

I think it has a good chance of holding, but there is a lot of uncertainty right now.

We’re just looking for a catalyst, and it's probably going to be earnings driven. We're just kind of waiting to see how quarterly earnings will be.

The consensus seems to be inflation has kind of peaked, but the Fed says they expect it to remain elevated for quite some time and not to come back down all that quickly.

So these things are holding the market down at the moment and creating this sideways consolidation.

Now, with a sideways consolidation and high volatility, it can be really hard to determine whether the market is going up or down.

That's why we're going to focus on the higher timeframes, because it can help us clarify the market direction.

As you can see, there’s a lot of choppiness right now, and 4,100 is kind of our base of support (yellow line).

And fortunately, the good news is we've been closing above the support (yellow circle).  service.
Now, let's look at the Nasdaq (QQQ):
This 4100 level is very significant, as there was a major pivot point back in March off this level (2nd yellow circle from the right)…
And we also saw huge upward movement from this exact level in May of 2021 (yellow circle on left).

So this is a really strong support, and that's why we're probably seeing a lot of rejection of that level.
Again, we can see a lot of sideways consolidation the past few weeks, but also off of a strong support level (yellow line).

You can see back in early March of 2021, there was strong support at the same level and a huge move up (yellow circle on left).

It sparked that final leg of the Bull market through the end of 2021, and then the turnover there  in 2022…

But that's why this is so strong. As long as this level can hold the support – and it seems to be doing that, there's potential for a new leg higher again.

I think inflation has largely done its immediate damage to the stock market, but there could be lingering longer term damage.

And I've talked to some economists and other experts, stock market experts, and the consensus is that this could take 12-to-24 months for the dust to settle.

So I think we are going to really stay in a bear market for the next year or two, but probably at least until the end of this year.

But look, even if it’s a “bear market”, we can still get bear market rallies.

Even when we're in a bear market, we can still get some big moves off major support levels, which is why this is so important.
If we can push higher on the Nasdaq, we've got our strongest level of resistance, which has traditionally served as support (top yellow line).

You can see I’ve circled on the top line May of last year, and then February and March of this year, we kind of came up and played with that level a few trading days ago, but not quite.
First we need to get through this level of resistance, and then we've got some room to run to the upside (yellow circle on right).

Then we'll encounter the next level of resistance, and that one's going to be much harder to get through. (top right yellow circle).

So for now, we’ll be watching that bottom line for major support, and then these two upper lines for major resistance on the Nasdaq.

In this case, we're looking at Daily time frame to hold a level for support or reject a level for resistance. But when it does eventually break in one direction, it tends to be a stronger move the longer that consolidation occurs.

That’s why we’re about to look at the Weekly and Monthly charts – because in volatile times like we are seeing in the Daily charts, you can really get a lot more clarity looking at higher time frames.

Most people never really think to look at higher timeframes…

Let's say you're trading a “30-minute” or the “Hourly” chart.

You might be thinking, “There's a lot of chop going on right now on, it's just moving sideways and I can't figure out which way it wants to go.”

Often when you encounter that difficulty, the next best step is to look at a higher time frame to get more clarification for trend direction and then momentum.

That's what we'll focus on right now…

Let’s take a look at this chart of Alphabet (GOOGL):
You can see a lot of consolidation back in March of 2021 that broke to the upside in April.

Obviously, shares took off with the broader markets and then sold off with the broader markets and came back down into that support area.

But then in 2022, a pending buy signal came in May 27 and triggered on May 31st.

So GOOGL still looks like it's got momentum. This is actually a good case study because we're getting some sideways consolidation.

This is where we can go to the higher timeframes to get a clearer picture of what's going on.

We also want to keep an eye on our selected time frame, in this case the Daily chart, where our resistance levels reside with a long directional bias or a buy signal in this case.
If we look at overhead resistance, the strongest for GOOGL is up around 2500 (top line).

You can see there was support at this level in the middle of 2021 and early in 2022 (bottom line). That was a strong support level but now serves as resistance.

And of course, as I mentioned over the last few trading days, there has been a nice move off the prior support level and accurate buy signal. But things are starting to stall out.

We're getting a little bit of sideways movement here and the strong upside momentum is kind of slowing down.

So we may want to see a clearer picture if we intend to buy shares, or maybe it could reverse and we’d potentially start scaling out of the position.

This is where it can become useful to go up to a higher time frame.

So let’s go to another chart, and we’re going to talk about implied volatility.

We're going to look at a higher time frame or even two higher time frames and look what implied volatility
is doing in conjunction with the price movement. In most cases…

Implied Volatility rises as the share price falls.
On the Daily chart, we see the stock is trending down (upper chart) as the implied volatility is  trending upward (the bottom chart).

And we want to answer the question, “Do I expect Google to break through resistance and continue to move higher? Or will it get rejected the resistance?”

Well, that's where we're going to look at higher timeframe charts with implied volatility. So here’s what I would want to see with Google…

•    I want to see the stock break the resistance levels and move higher.
•    I want to see implied volatility break this trendline and move lower on the bottom chart.
•    And I want to make sure it's in line with the higher time frame charts.

So let’s change from the Daily to a Weekly chart to get a bigger picture.
You can see this 2500 level is strong as we saw on the Daily chart (top blue lines crossing).

So that 2500 level is our major resistance to encounter, and I’d be looking for that on the Weekly chart.

Interestingly, we're actually getting a pending buy signal on the Weekly chart for Google (yellow circle)

But I’d want to see is the potential trend reversal going to grow legs and continue.
And then I’d be asking myself “Where did this move come from?”

So I want to look for support on the Weekly chart as well
There is strong support and resistance around the 2000 to 2100 zone (yellow lines).

if you look at the yellow circle on the left, we've got this major support zone at 2100 back in early 2021.

Look at all that consolidation right there on the Weekly chart that eventually resulted in a huge breakout.

Remember at the start of our session when I mentioned if you see a lot of price consolidation at a support level or resistance level, and then it eventually makes a directional break. In this case, it did.

That gives us more confirmation that if we can stay above this level and implied volatility comes down (bottom right arrow)…

We could see another big move up in GOOGL.
So there was a lot of price consolidation early last year in Alphabet that resulted in a big break.

Then we came back down and retested the level a couple of weeks ago, and now we're moving up off of it (yellow circle on right).

But again, we've got significant overhead resistance at 2500 (top yellow line).

We have a good probability of coming up to that 2500 level and finding resistance there.

But again, with the caveat, we need to see implied volatility break this trendline (bottom right).

So those are the things on the Weekly chart I would look at.

And then we can expand to the Monthly chart and see what it's telling us.
At the bottom, we have “IV” (implied volatility) is high on a Monthly basis. So we're at highs around levels from back where you see the yellow arrows.

It's always good to look at IV on a Monthly chart, because here we can see a major resistance around that 40% level.

And then of course, what happened last year? The stock went up (top right arrow).

Each bar here is equal to one month, so this upward move lasted about 12 months.

Again, right now there's still an upward trend line on IV, but if this can break below the trend line on the Monthly and go down, the stock could move up.

Now, watch the upper chart support level at 2500. There it is below (yellow horizontal line).
You can see on a Monthly basis how strong that was, and it becomes a lot clearer when you’re looking at the higher time frame.

It's easier to see this support than perhaps it was on a Daily chart. And that 2500 was actually support for a few months (yellow up arrows).

But when it came back down and broke the line it became resistance (yellow down arrows).

So 2500 is going to continue to be major resistance until the stock can break through, and then it would serve as support again.

It’s a bit of a tricky situation right now but looking at the Weekly and Monthly timeframes gives me a clearer picture of what to look out for.

Then if I'm looking at that buy signal on the Daily chart is it coincided with what's happening on the Weekly and Monthly.

We get a confident decision, and then we've got positive price momentum with IV implied volatility dropping back down.

So that was a good case study to demonstrate the importance of using the higher timeframes and looking at implied volatility with these levels.

In conclusion, if you can start Mapping those levels out, keep them on your chart, and then correlate all of those levels to what's happening with implied volatility… This could give you a huge edge over the average trader.
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