Looking at the Big Picture

One of the tools we use day in day out to look at the markets is multiple timeframe analysis.  What this means is looking at our charts in different timeframes.  This could mean a 15min chart, a daily chart, or a weekly chart.  Each timeframe tells a slightly different story, it is the combination of these timeframes that gives a trader his ideas and conviction for putting on a trade.  More often than not the bigger money trades are going to be when the lower timeframes are confirming a higher timeframe trend.  I made the mistake this week of putting too much emphasis on the lower timeframes.   When it came time for the daily timeframe trend to continue I wasn’t quite ready for it and didn’t make what I should have. 

For the previous seven days, before Friday, the market had been in rally mode.  Ever since we had broken 1040 in the S&P 500 and failed to push lower the market had exploded higher.  If you were trying to establish shorts during this period, more than likely you are licking your wounds right now.  Any selloff during this period was met with buying and shorts were just not working.  But in the back of your mind should have been how far we had fallen for the past 2 months and a rally should have been expected.  The market wasn’t just going to go straight down, was it?

I know what I missed.  I was putting too much emphasis on the past few days and was missing the big picture.  I was setting up plays for the market to break its 3-day consolidation to the upside and not setting up enough plays for if the market broke down.  For the past 3 months this market has been really weak and a low volume uptrend should not have changed my longer-term outlook.  You want a stock that is in a strong daily downtrend to rally a bit, it gives you very defined risk/reward scenarios.  The three-day consolidation should have been a sign that the rally was over and I should have been chomping at the bit for a break of the three-day lows.  I caught a nice breakdown in Cliffs Natural (CLF) that turned Friday into an ok day for me.  Missing Research in Motion(RIMM), Best Buy(BBY), Suntrust(STI), and Wells Fargo(WFC) is just unacceptable.  The market left money sitting in a corner and I didn’t take advantage. 

But Monday is another day.  Is this the beginning of a downtrend to test the 1040 level?  Are buyers going to come in and continue the rally?  I don’t know the answer to this, but what I do know is you have to be ready for anything.  Friday was a great lesson for me in my trading career.  I got too wrapped up in the shorter timeframe trades and should have been paying attention to the bigger picture.  As a trader you are going to make mistakes.  With proper risk management you will live through these mistakes.  Hopefully you will still be around when the education from these mistakes pays you off.  I know the next time the market provides an oppurtunity like this I will be ready, will you? 

Kyle