A tale of time frames

S&P500 5 minute chart @ 12:59 EDT

Another indecisive day in the markets.  Up 0.5% at the open, dropped negative 0.5% in the first hour of trade and then back up 0.5% again the following hour.  Moves like this make it seem like the market really knows what is going on doesn’t it?  You’ll give yourself a headache (and most likely lose money) if you think you can find patterns in this random noise.  The market doesn’t know what’s going on any better than we do and is why it is drifting around while fools and suckers try and trade the next move.

Bernanke’s testimony before the Senate Banking Committee offered no new hints of additional easing, triggering the early slide.  But this really shouldn’t come as a surprise to anyone.  The Fed has one bullet left and they are not going to use it except in the most dire situation.  And if they do use it, that should be a huge warning to the rest of us; if the Fed is nervous, we should be nervous.

S&P500 daily @ 12:58 EDT

Bernanke’s comments also affected the currency market because the lack of further money printing strengthened the USD relative to other currencies.  The inverse USD – US equities relationship continues to hold up and the strong dollar pressured stock prices early.

The recent price action coming out of the markets is garbage and can’t be relied on for any meaningful analysis.  Using longer time-frame charts helps filter out some of this noise.  A weekly chart of the S&P500 shows the indexes are doing a good job of holding the 200dma and is in a modest uptrend.   As long as we continue to muddle through this recovery without any major stumbles from Europe, China, domestic employment, or Congress, we should make it through to the other side without too much damage. We will continue to see short-term volatility, but the longer term uptrend should remain intact.

The problem with interpreting shorter time frame charts is they are are filled ominous looking spikes and drops, especially in the intraday charts.  WON primarily uses weekly charts when browsing stocks because it cuts out most of the random noise and gives him a much better feel for how the stock is actually behaving.  When you find yourself confused by the price action in a chart, change to a longer time frame and things will come into focus.

S&P500 weekly @ 12:58 EDT

As for trading the markets, this continues to be a very poor environment to own high beta growth stocks as defensive sectors and stocks continue leading the market.  Often the hardest thing to do in the market is nothing, and that is exactly what we should be doing right now.  Wait for conditions to improve and become more favorable before putting your hard earned money at risk.

Stay safe