October 18th, 2005
What does a “time horizon” mean to a stock chartist?
It’s usually omitted in most commentaries of either individual stocks or the market as a whole but an element I believe should be factored any analysis. A chart is merely a snapshot of the history of a stock’s supply and demand balance over time.
A share bought today is one that the seller purchased previously. And the Seller’s sell decision of when to sell and what price is often (erroneously, of course) impacted by the price and timing of their purchase decision. When there’s an aggregation of shares traded at specific prices, or when the balance between buyers and sellers reverses, those shares become future support or resistance volume at those or similar price levels. Those shifts in the supply and demand balance are clearly discernible as fluctuations and patterns in stock charts.
Therefore, to understand the future risks and opportunities of a stock, one needs to look at charts in several time horizons to discern what sort of impact the decisions concerning shares purchased in prior transactions at various prices may have on the current and future supply and demand balances.
Take, for example, the charts of Alliance Capital (this is only an example; any stock could have been selected):
There’s a guy on TV pitching Channeling Stocks, stocks that go up and down in a set range. This short-term view (June-Oct, 2005) of AC price movement indicates support at 43.65 and resistance at 48.15. According to the ChannelingStocks.com premise, one would buy at the support and sell at the resistance lines.
Extending the view by a year, or 12 months (July, 2004-Oct, 2005), you get a different picture leading perhaps to different conclusions:
While the current channel is still in tact, it transforms into perhaps a consolidation after a significant nearly 50% increase (from 33 in July, 2004 to 48 in February, 2005). Perhaps that move may have over-extended itself and has needed the past nine months to consolidate and, as the saying goes, regress to the mean.
Adding some more depth to the perspective and we find that the current consolidation is more than 18% below the all time high for AC of 56 in January, 2001. AC peaked in 2001 and continued to decline in 2002, finally bottoming out in 2003. The current consolidation, therefore, appears now to be a way-station on the road to testing the old all-time highs.
And, finally, AC’s price was carried along with the rest of the market since it started trading in 1988 through the whole 90’s bull market and peaked along with the rest of the market in 2001.
In conclusion, with this longer-term perspective, as contrasted with the “Channeling Stocks” strategy of buying at the bottom of the range and selling at the high end, my strategy for stocks like AC would be to hold off committing until I witnessed a continuation of its long-term upward trend as evidenced by a convincing breakthrough of the upper-end of the current resistance level.