Using Weekly Charts for Crystal Clear Stock Analysis

It's tough to see the forest, when you're in the trees, there's no doubt about it. Moreover, for most traders, day-to-day market noise is something that we have to constantly contend with. Regardless of noise, we might have simply lost sight of larger occurrences within the market, something overcome by taking a step back from daily charts and taking note of weekly and monthly charts, instead.

Head and Shoulders above the Crowd

The concept is simple, really. When the market seems hectic, step back, take a deep breath and look at the macro picture. By doing so, we can spot larger moves ahead of time, something that can be illustrated repeatedly in the market. For example, the current market decline was clearly noted on weekly charts in 2007, after a 'head and shoulders' appeared throughout the year.

Head and Shoulders is a simple technical analysis-charting tool, which looks for two shoulders and…a head. It is simple, but effective. Disecting the tool, in an ascending trend, a bold high (left shoulder) is the first part of the pattern. Shortly after, the market instrument pulls back and then creates a higher high (head), but sells off once again shortly after. Then, when the instrument attempts to rally, it fails to create another higher high in the range. Finally, the neckline (ascending support) is breached, inferring that a larger reversal is occurring. What's important to note within the pattern, is that when the final right shoulder fails to create a higher high, the event is really indicating there simply are not enough interested buys to push higher. In the end, those who purchased at previously elevated levels will likely begin dumping positions to protect capital, thus stimulating a torrid decline through the neckline.

The Big Picture Showed the Present Market Decline in Advance

Taking the previous information and applying it to the present market, the weekly chart tells all. During 2007, a head and shoulders appeared 'loud and clear' throughout the year. And, at the end of the year, the Dow Jones Industrial Average breached the neckline, something that was a major sell signal.

Chart courtesy of StockCharts.com.

The head and shoulders was apparent on the daily chart as well; however, those who often take a step back to look at weekly charts, may have more-easily taken note of the key event.

Fact is, when the weekly chart neckline was breached, those who hung onto their positions, obviously missed this vital technical occurrence. Moreover, at the same time that the neckline failed, many weekly technical indicators were showing considerable signs of breakdown, something that provided additional confirmation that the relevant ascending trend was over.

Really, what all of the above information comes down to is how vital it is for investors to take a step back from daily charts from time to time, and take a look at the larger picture, especially in seemingly never-ending trends. By doing so, we are able to see the macro story unfolding, something that may keep us head and shoulders above the crowd, should a reversal occur.

Mark Whistler is the founder of WallStreetRockStar.com and is the author of multiple books on trading.

Mark's newest book, The Swing Trader's Bible (John Wiley & Sons, Inc.) - co-authored with CNBC/Fox News regular guest Matt McCall - will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.