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L.A. Little, Senior Contributor
07/15/10 - 10:17 AM EDT
One of the most important things you can do as a trader is to trade in the direction of the trend. The direction of the trend is a lot easier said than practiced. What does it mean to trade with the trend? What trend are you trading? Is it the general market, the sector, the stock, or all three or some combination of them? And even if you figure out which of these trends you care about, what time frame are you trading? And to further complicate things, if you are trading the intermediate-term time frame are you also trading against the short-term time frame's trend? It really does matter, you know.
One of the reasons I constantly point out the various time frames is because you have to know the technical points for each time frame because they do compliment each other. Take General Electric(GE), for example. Is the trend higher, lower, or just sideways for each of the three time frames? On the long-term chart, the trend still remains confirmed sideways as it was back in late January when we last looked. It's on the shorter-term time frames that things have changed a bit.
That trend continued for another month until the "flash crash" and since then it has been all downhill as GE has traded back to the nice anchor bar support low at the $14 level. As part of that selling, the trend changed from suspect bullish to suspect sideways on the "flash crash" weekly close and then, when that low was broken, the trend changed to suspect bearish.
In simple language, GE has no volume confirmation on the way up or on the way down. When a stock can't get follow-through volume, up or down, then it will go sideways. Sideways doesn't mean it just drifts aimlessly but that it instead trades in some sort of range. On GE, you can see a range in the weekly chart -- the support and resistance zones are drawn in.
For example, the gap down under the swing point from the day of the "flash crash" did not see volume expansion. That makes it suspect. If it's suspect, then there is the need to retest and regenerate. The idea behind retest and regenerate is that prices should trade back to the area where suspicion was created and retest it. If it comes in with lighter volume than what was recorded on the break down, then there's a good chance the break was real and prices will head lower once more. As can be seen in this chart, GE did trade back to retest, but so far prices have moved higher even with lighter volume on the retest.
So the retest took place, but the regenerate and head lower has been delayed. All in all, two of the three time frames show a sideways trend while the short-term trend is suspect bearish but on the verge of changing to sideways as well. A sideways trend is a range trade and GE is a sideways trend. In such a trade, you buy the bottom of the range and sell the top of it. In the case of GE, you can do both (shorting the highs as well).
Note that GE reports earnings this Friday so the idea trade would be to monitor the action resulting from earnings and then look to trade the range once the stock settles in.
Until next time, just keep trading the charts.
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The MasterCharts
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