Aim of analysis
Suitability for entry for short term trading of 2 weeks to 2 months.
As I have highlighted in my previous posts holy grail of investing part 1 and part 2, the first and most important part of trading or investing is to determine your purpose. Certainly an analysis may be used for different types of strategies, but I feel that it is important to highlight the state of mind of the analyzer when they were performing the analysis.
Many of my previous analysis for example, were done with the mind set of long term investing. In hindsight, some of them may also be used for short term trading like my analysis of Krono and indeed it has gone up considerably since my analysis hardly a month ago. Others like Bauto are indeed suited for longer term investing – which was my mindset when doing the analysis.
Although certainly no one can really accurately time the market – and I am an ardent believer in the wisdom “It’s not about timing the market, but rather what matters is our time in the market” – but having a strategy is definitely a must.
Support and resistance levels
Since my plan is to trade short term, looking at the larger time frames is not exactly going to be much help but I like to build my support and resistance lines top-down. Find some rough areas on the larger time frames and then adjust them accordingly on the smaller time frames. You may agree or disagree with this method, it’s just something that I like to do.
The larger time frames may also sometimes show us the more obvious support and resistance levels that may be more difficult to spot on shorter time frames.
This weekly chart shows that the price of Ford Motor has formed a higher low at around $8.43 compared to the low in early 2019. For it to be in a confirmed uptrend, the price would need to form a higher high by breaching the $10.5 level. It may challenge this level but $9.6 may be a shorter term resistance that it will need to break before going towards the $10.5 level.
You could have all this on the daily chart of course, but longer term traders, trend riders and position traders may be interested in the next resistance.
For shorter term traders, the $9.6 level may be used as a target price (TP).
For this trade, my aim is to catch the shorter term trend thus I am taking the SMA50 (blue line) as my support, rather than the structural support of $8.43 or thereof.
Short term trend trade using the SMA50 and SMA20 as trend indicators and structural resistance levels for potential TP.
If you’re trading shorter term, you’d probably want the trend strength to be in your favor and momentum to be strong as well. The DMI shows that Ford stock is currently in a retracement which can be seen in the falling ADX (gray line) after a period of strong upward move (the preceding segment where the +DI (green line) is above the -DI (red line) and there is a wide divergence between the two with the ADX moving upwards). The +DI and -DI have converged which also indicates a weak trend along with the falling ADX.
So trend isn’t exactly in favor of going bullish. At least not yet. And maybe not ever – either one can be the next scenario. This is a risk to be aware of.
Momentum is also not in there yet as can be seen by the low stochastic.
Although trend strength and momentum are not there yet, the short term trend does show a possible new uptrend as it has formed higher highs and higher lows. And although the stochastic has crossed below the 80 line from above, price did not fall below the previous low which may indicate some strength in the uptrend.
Price is also near the support of SMA50 hence reducing risk of entry at this point.
It’s definitely not a perfect setup but it is a lower risk entry. For those willing to give it some time, it may be considered for short term trend trading.
My strategy is to cut loss (CL) if price falls below the SMA50 on strong volume. I will hold the position as long as the SMA20 is above the SMA50. I will consider the structural resistance levels for TP, or may hold the position to ride the trend to the end if market conditions are favorable.
Of course, anything can happen. So trade at your own risk.
You may also wait for confirmation of the trend and for momentum to kick in and enter later.
I have entered a long position in Ford Motor (F) on 9/1/2020.
I’d appreciate any opinion or suggestions to better my trading.