The key to trading on a short term time frame is always keeping the larger time frame trend in mind. Looking above at the larger time frame, the 90 minute charts for the DIA, QQQ & SPY we notice that all 3 had traded down into a support zone.
From the pivot highs of all 3 indexes, the SPY & QQQ retraced back down to just above the GAP zone & into their 20 period exponential moving averages and the DIA traded into its 20 period exponential moving average & also a lower trendline of its bull flag for the 90 minute chart.
Looking at the short term time frame, the 5 minute charts for the same 3 stocks, QQQ DIA & SPY where in a downtrend for most of the day, allowing short term scalping opportunities to the downside on every retracement to the 20 period exponential moving average.
The 20 period exponential moving average is used as a short term support and resistance in a trending market., Notice how on both the larger time frame charts above used the 20 ema as support where as the 5 min charts below used it as resistance.
Understanding the use of multiple time frames allows a trader to see both the both
the short term & long term term trends & how support & resistance become factors for key turning points.
Price support/resistance are the result of pivot highs & lows, GAP open & Gap close are also considered price support & as stated above, the 20 ema is considered moving average support/resistance.
When watching the 3 indexes ( DIA, QQQ & SPY), one key to finding turning points is to watch for divergence's, this allows for entries on a short term time frame & leads to powerful moves using larger time frame supports. Risk is kept to a minimum because the entries are based on a short term time frame.
Below you could see the same 3 indexes (DIA QQQ & SPY), BUT notice how the DIA & SPY tested to NEW lows & the QQQ put in a higher low on the final push down into support on the 90 min. charts giving a buy divergence on the 5 minute chart.
As you could see above, all 3 indexes had been in a downtrend on the 5 minute charts & confirmation of the buy divergence came at a break above the blue trendline.
When watching for turning points in the markets, timing is critical, watching the higher time frame supports & resistance levels is key on higher time frames as your entry is on the short term time frame, price divergence on the indexes is one key factor to determining entry signals.
This is one way to time the markets with a low risk entry is by using a protective stop loss at the last recent pivot low of the short term time frame.
Profit exits are determined by the goal of the trader & the time frame used, a 5 minute chart would give exits at resistance's above from the intraday pivot highs from the downtrend for scalping opportunities where as a 90 minute chart would give exits at its pivot highs on that time frame or in the case of these charts, a retest of the last swing high of the 90 minute charts above. Criteria for short entries is the reverse of the above information.
