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Investing Articles

Market Timing - Top Down Approach

"There are many ways to skin a cat." This axiom applies as well to the subject of Market Timing. The tools available today are numerous, allowing for both creative and confusing analysis.

In my nearly two decades as a trader and market analyst, I've seen many approaches used in an attempt to time market turns and plan trades. Most often, having many different approaches leads to greater confusion and a lack of confidence in the results. Keeping the analysis simple is most often the best way to go.

One very simple analysis technique that is often overlooked is the "top-down approach". This employs using multiple time-frames to zero-in on the direction the market should be traded in.

Another common axiom is that "the trend is your friend". One of the best ways I have found to determine the trend is to use the top-down time-frame approach and a single chart indicator called the Stochastic.

Appplication

Starting with a 'monthly' chart of the market to be analyzed, apply a single Slow Stochastic set to 5,5,5. I have found this setting works quite well for this purpose. However, feel free to experiment with other settings, such as 5,3,3 or any other, to see which appears to work best for the market you are analzing. Remember, each market behaves differently and so there is not a "one size fits all" here.

With the indicator plotted on your 'monthly' chart, note the current monthly direction and whether the Stochastic oscillator supports it. If you see that the Stochastic has been moving up from the oversold zone (this zone is usually below 20-25) towards the 50, even better above it and towards 80 (75-80 usually is considered the overbought zone), and that monthly prices appear to have been forming higher swing bottoms and tops, you know the trend is up for the 'long-term'.

Then moving down to the 'weekly' chart, you do the same exact thing. If the 'monthly' is considered up, you want to see the 'weekly' doing the same. When it is, then move down to the 'daily' chart.

Once the 'weekly' is in sync with the 'monthly' as to the trend, you can go to the 'daily' chart. On the daily chart, following our example of a bullish trend, we want to watch for prices to 'pull-back' (also known as 'retrace' or trend 'correction' - moving down against the bull trend) and the Stochastic to go oversold. If it does this and daily prices have NOT moved lower than the low of the last 'pull-back' (retrace - trend correction) on the 'daily' chart, then the probability is very high that the daily trend is likely to start to resume its original trend (start back up again in this example).

If you have access to intraday charts as well, you can further refine your timing. Go to the 1-hour chart and apply the same technique as you did to the time frames above. From there, go to the 10-minute chart and do the same. From my experience, I have not found it necessary to go any lower than 10-minutes. One important detail here using the intraday charts is that you may with to WAIT until the intraday pattern on the 1-hour chart looks like a 1-2-3 formation pattern (1 being the bottom of the hourly move. 2 being the rally up. 3 being the next move down that does not move below the bottom low of 1 at the time the Stochastic goes oversold on the hourly as well as the 10-minute chart).

 


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You will want to practice this for a short period before relying on your analysis for timing your trades. While this is a very simple market timing approach that anyone can do, it does require getting familiar with working with different time-frames. As a Market Analyst and trader for nearly two decades now, I have found that one extra indication makes a very big difference in market timing. This would be the use of 'time dates'.

Using 'time dates' along with the technique above, you are zeroed into a time 'period' in which to watch for the above to occur. If you are using the simple 'top-down approach' taught in this article and you think you have a buy signal, but this signal happens to be a couple days outside of the next 'time date', it is a good tipoff that you may be perhaps a day early and should wait that extra day, perhaps two. You may find that you still end up with your original signal, but now INSIDE the 'time-date' window. This is a REAL EDGE to market timing.

The 'time-dates' I'm referring to is of course the ones produced using a proprietary geo-cyclic algorithm within the PROGNOS Market Forecasting software. While this software is only available for purchase by our clients with at least one-year as a Premium Member, the weekly results from this program are provided via our weekly PROGNOS Report issued to all our client/members. Having these 'time-dates' for market tops and bottoms along with using the simple 'top-down approach' taught above, traders can time market moves with greater precision with less risk and greater profit potential.

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