Stocks moved sideways last week with most of the major averages finishing within 1% of where they started. The Amex was the big "winner" - up 1.7% - while the Nasdaq lost 0.6% and everyone else finished up somewhere in between. In this week's newsletter, John Murphy looks at the relationship between the US Dollar and Commodities, Carl Swenlin looks at how the mid-caps are doing, Richard Rhodes looks at Interest Rates, and Arthur Hill looks at the Nasdaq's "Big Picture". But first, I'm kicking off a ten part series on John Murphy's 10 Laws of Technical Trading:
LAW #1: MAP THE TRENDS
Murphy's Law #1: Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale "map of the market" provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends. - John Murphy
The "Gallery View" tool at StockCharts.com was custom designed to give you the long-, mid-, and short-term view of any ticker symbol in our database. It is the quickest, easiest way to follow John's advice in Law #1. To create a Gallery page for any stock, simply go to our homepage, find the blue box labeled"Easy as 1-2-3", select "Gallery View" from the first dropdown box, enter your ticker symbol in the second box, and click the "Go" button. Here's an example of what you'll see:
Starting at the bottom and moving up, the "Point and Figure" view gives you the long-term story for the stock. While P&F charts may look strange at first, they are probably the best way to analyze a stock's long-term situation. The automatic trendlines can easily show you if the stock is currently trending up or down in the long-term. In the case of IBM above, the red downtrendline that began last February is dominant however, the stock is currently in a rising column of X's after creating a Low Pole reversal pattern on June 8th.
Moving up to the "Weekly View", we see that IBM had trouble getting above 90 in early 2003 and then reversed right at the 100 level in February 2004. Subsequently, it moved below the 40-week moving average and recently hit a low of 85. The stock has been underperforming the S&P 500 since hitting its high in February. There is a positive development on the chart however as the weekly PPO (a cousin of the more popular MACD indicator) has recently moved back above its signal line. The "Weekly View" also gives us a go view of IBM's current volume trend - down.
The "Daily View" gives us a better picture of that recent positive development. There we see that the stock is faltering again just after clearing the resistance level at 90. While the PPO and the Chaikin Money Flow are still moving higher right now, their upward progress is starting to slow.
The "Intraday View" shows us the IBM tested the 90 level near the start of the past three days. On Wednesday and Thursday, the stock recovered and moved higher. On Friday however, the stock's price eroded throughout the day and, significantly, closed below 90 - a sign of technical weakness.
At this point, we have a solid understanding of IBM's technical situation - the context that the stock has been trading in both recently and over the past couple of months and years. That context gives us a much more objective outlook on the stock and how we should trade it (if at all). So remember, never forget John's Law #1. Tools like our Gallery View make it really easy to follow this part of John's advice.
