The financial media divides market participation into time frames, with scalpers and day traders at one end of the spectrum, while market timers and investors reside at the other end. But all approaches have one thing in common: they yield more profitable results with price charts attuned to the participant’s holding period. This includes investors who typically avoid technical analysis, preferring balance sheets or competitive positioning to make buy and sell decisions.
While traders examine intraday, daily and weekly charts to predict outcomes, investors can look at monthly charts to gauge progress while remaining at arm’s length to avoid interfering with price discovery. At the same time, their investigation establishes broad parameters where a) positions will be terminated when long-term price action no longer supports favorable outcomes or b) additional shares will be bought when long-term price action supports increased exposure.
Monthly Chart Signals
Charting supports all levels of market activity because price development has a fractal quality, with trends and ranges unfolding independently in all time frames. For this reason, a scalper can play the same security as an investor because each is focused on price action specific to his time frame of interest. For the investor looking to hold positions for many years, the monthly chart offers an excellent source of analytical data that requires just a single day each month for review.
Investors can simply review profitability at that time or take the examination one step further and improve results with market timing principles that open, close, add or reduce positions based on technical signals that come into play just a few times over the course of three to five years. It’s a simple analytical setup that uses several moving averages and a relative strength oscillator to capture long-term shifts in buying and selling behavior.
Start by adding 50- and 200-month EMAs to the price chart, noting that long positions work best when the security trades above those levels and is grinding through a bear market when they trade below. Then add a monthly 5-3-3 Stochastics indicator that will oscillate between overbought and oversold levels, often reaching either end just a few times over a five year period. Not surprisingly, those higher and lower extremes tell investors it’s time to take action, whether to protect their portfolios or open them to increased risk.
Apple (AAPL) monthly Stochastics descends into the oversold zone for the first time in seven years in late 2008 while price drops below the 50-month EMA. It ticks above the moving average in April 2009, at the same time the indicator lifts into a new buy cycle. This powerful entry signal precedes a massive rally to an all-time high.
The stock enters a significant correction in the second half of 2012, selling off to the 50-month EMA in 2013, at the same time the Stochastics indicator drops back to the oversold level for the first time in more than 3 years. Once again this potent combination provides an excellent entry point for an historic buy signal and uptrend.
Positioning in the Current Decade
Monthly charts also allow investors to work profitably with broad themes that characterize each bull or bear market cycle. This is especially useful in the current cycle, which began after the market crash left equities at multiyear and multi-decade lows. Price action between 2007 and 2009 generated a minefield of technical barriers that equities needed to overcome in subsequent years, with many securities still working through those levels in the middle of this decade.
Investors can examine these obstacles with a Fibonacci grid stretched across the highest high just prior to the bear market and extending it to the deep low posted in 2008 or 2009. Then look at price action off the lows, noting how the security’s behaves at key retracement levels. Uptrends in recent years have typically run into resistance at the 62%, 78% and 100% retracements. Investments that have reached these levels are vulnerable to reversals that can reduce or eliminate long-term profits.
Pepsico (PEP) highlights the interaction between price development and Fibonacci harmonics after the 2008 crash. It sells off from 79.79 to 45.37 and bottoms out in March 2009. The subsequent recovery wave stalls in March 2010 at the 62% selloff retracement, where it grinds sideways for 14 months, before rallying into the 78.6% retracement. Monthly Stochastics picks up these turning points, spiking into the overbought level.
The stock reverses at that harmonic level in June 2011 and drops to a 52-week low, before bouncing strongly and returning in August 2012. It grinds sideways for another 6 months before breaking out and rallying just above the 100% retracement, where it stalls out once again. It sits on that level for another 14 months, finally completing the breakout and hitting an all-time high.
The Bottom Line
Investors can increase profits with monthly charts that uncover new opportunities and gauge the progress of open positions. They also work as risk management tools, allowing timely responses to significant changes in market conditions.