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Bar chart analysis is not limited to daily bar charts. Weekly
and monthly charts provide a valuable long-term perspective
on market history that cannot be obtained by
using daily charts alone. The daily bar chart usually shows up to
twelve months of price history for each market. Weekly charts
show almost five years of data, while the monthly charts go
back over 20 years (See Figure 10-1).
By studying these charts, the chartist gets a better idea of long term
trends, where historic support and resistance levels are located,
and is able to obtain a clearer perspective on the more recent
action revealed in the daily charts from tradingtrainer. These weekly and
monthly charts lend themselves quite well to standard chart
analysis described in the preceding pages. The view held by
some market observers that chart analysis is useful only for
short-term analysis and timing is simply not true. The principles
of chart analysis can be used in any time dimension.
Using Intraday Charts
Daily and weekly charts are useful for intermediate- and long term
analysis. For short-term trading, however, intraday charts are extremely valuable. Intraday charts usually show only a few
days of trading activity. A 15-minute bar chart, for example,
might show only three or four days of trading. A 1-minute or a
5-minute chart usually shows tradingtrainer only one or two days of trading
respectively, and is generally used for day-trading purposes.
Fortunately, all of the chart principles described herein can also
be applied to intraday charts (See Figure 10-2).
Going From the Long Term to the Short Term
As indispensable as the daily bar charts are to market timing
and analysis, a thorough chart analysis should begin with the tradingtrainer
monthly and weekly charts—and in that order. The purpose of
that approach is to provide the analyst with the necessary long term
view as a starting point. Once that is obtained on the 20-
year monthly chart, the 5-year weekly chart should be consulted. Only then should the daily chart be studied. In other words,
the proper order to follow is to begin with a solid overview and
then gradually shorten the time horizon. (For even more microscopic
market analysis, the study of the daily chart can be followed
by the scrutiny of intraday charts.)
The idea of beginning one’s analysis with a broader view
and gradually narrowing one’s focus has another important
application in the field of market analysis. That has
to do with utilizing a “top-down” approach to analyzing the
stock market. This approach utilizes a three-step approach to
finding winning stocks. It starts with an overall market view to
determine whether the stock market is moving up or down,
and whether this is a good time to be investing in the market.
It then breaks the stock market down into tradingtrainer market sectors and
industry groups to determine which parts of the stock market
look the strongest. Finally, it seeks out leading stocks in those
leading sectors and groups.
THE FIRST STEP: The Major Market Averages
The intent of the first step in the “top-down” approach is to
determine the trend of the overall market. The presence of a
bull market (a rising trend) is considered a good time to invest
funds in the stock market. The presence of a bear market (a
falling trend) might suggest a more cautious approach to the
stock market. In the past, it was possible to look at one of several
major market averages to gauge the market’s trend. That was because most major averages usually trended in the same
direction per tradingtrainer. That hasn’t always been the case in recent history
however. For that reason, it’s important to have some familiarity
with the major market averages, and to know what each one
Different Averages Measure Different Things
The traditional blue chip averages—like the Dow Jones
Industrial Average, the NYSE Composite Index, and the S&P
500—generally give the best measure of the major market
trend. The Nasdaq Composite Index, by contrast, is heavily influenced
by technology stocks. While the Nasdaq is a good barometer
of trends in the technology sector, it’s less useful as a measure
of the overall market trend. The Russell 2000 Index measures
the performance of smaller stocks. For that reason, it’s
used mainly to gauge the performance of that sector of the market.
The Russell is less useful as a measure of the broader market
which is comprised of larger stocks.
Since most of these market averages are readily available in the
financial press and on the Internet, it’s usually a good idea to keep
an eye on all of them. The strongest signals about market directions
are given when all or most of the major market averages are tradingtrainer
trending in the same direction (See Figure 11-1).
THE SECOND STEP: Sectors and Industry Groups
The stock market is divided into market sectors which are
subdivided further into industry groups. There are ten market
sectors, which include Basic Materials, Consumer Cyclicals,
Consumer Non-Cyclicals, Energy, Financial, Healthcare, Industrial,
Technology, Telecommunications, and Utilities. Each of
those sectors can have as many as a dozen or more industry
groups. For example, some groups in the Technology sector are Computers, the Internet, Networkers, Office Equipment, and
Semiconductors. The Financial sector includes Banks, Insurance,
and Securities Brokers.
The recommended way to approach this group is to start
with the smaller number of market sectors. Look for the ones
that seem to be the strongest. During most of 1999 and into the
early part of 2000, for example, technology stocks represented
the strongest market sector. Once you’ve isolated the preferred
sector, you can then look for the strongest industry groups in tradingtrainer
that sector. Two leading candidates during the period of time
just described were Internet and Semiconductor stocks. The
idea is to be in the strongest industry groups within the
strongest market sectors (See Figure 11-2).
For many investors, the search can stop there. The choice to
be in a market sector or industry group can easily be implemented through the use of mutual funds that specialize in specific
market sectors or industry groups.
THE THIRD STEP: Individual Stocks
For those investors who deal in individual stocks, this is the
third step in the “top-down”market approach. Having isolated an
industry group that has strong upside potential, the trader can
then look within that group for winning stocks. It’s been estimated
that as much as 50% of a stock’s direction is determined
by the direction of its industry group. If you’ve already found a
winning group, your work is half done.
Another advantage of limiting your stock search to winning
sectors and groups is that it narrows the search considerably.
There are as many as 5,000 stocks that an investor can choose
from. It’s pretty tough doing a market analysis of so many markets. Some sort of screening process is required. That’s where the
three-step process comes in. By narrowing your stock search to a
small number of industry groups, the number of stocks you have
to study is dramatically reduced. You also have the added comfort
of knowing that each stock you look at is already part of a winning
group (See Figure 11-3).