When someone asks me what the trend is on a particular stock, the first question I ask them is, "What time frame are you looking at?" That's because the answer will typically differ according to time frame. For example, this past May I still considered a weekly chart of Monsanto (MON) to be bullish due to the larger overall pattern. At that time, when I put out the buy setup to watch for an entry, some traders thought I was crazy.
I can understand that assessment if someone had been looking at the daily chart, which was in rather bearish position technically. How do you reconcile that? It all depends on the time frame you are trading and what type of risk are you willing to take!
Let's take another look at that setup and see what we can learn from the past. Notice that, if you look at the declines on the weekly chart, they were similar to prior swings, both in price and in timing. That is one of the main reasons for setting up this trade. After all, my risk was very well-defined, with the maximum risk below the price cluster zone.
At the time, this is what stood out to me: The decline into May brought the stock down $14.25 in 15 weeks -- very similar to another prior decline of $14.39 lasting 15 weeks. Since Monsanto shares were in the zone that would have me watching for a buy trigger, I waited for my entry trigger on a 30-minute chart and bought some call options. I'm sorry to say that I was not patient enough to stay in the trade for the big run. That's certainly something I need to work on!
Now let's take a look at the daily chart and see why others were concerned about my sanity. First, on this chart you can see that the price was below both the 200-day and 50-day simple moving averages, which is not considered bullish on a technical level. Also, the five-bar exponential moving average was still below the 13-day EMA -- which means Monsanto in a bearish position according to yet another technical measure.
The first place where we started to see reversal indications was on a 30-minute chart and that would have given you an entry relatively close to where Monsanto's risk was defined. If you wanted to play it safe, however, what you could have done was to wait for the daily chart to show some reversal indications. In this way, odds would climb for the setup to play out in the bigger picture. Let's look at the point at which the daily chart finally suggested that a more important low might be in place, and that we were looking at a safer bet.
If you used a 30-minute chart to look for a trigger in this setup, that materialized May 21, and the fill could have been around $71.40 or so, after the $71.36 swing high had been taken out. If you wanted the safer bet, however, a reversal signal was seen on the daily chart as well -- on May 25, when the five-day EMA rallied beyond the 13-day EMA. The worst price you could have gotten filled at on that day would have been $74.09.
Since then, the stock has rallied to $84.02, and my initial upside target remains in the $87.82 area. So this setup is playing out nicely so far -- just keep in mind that not every setup will work. The good news is that the risk on those that don't work is extremely well-defined. When you do grab on to a good setup, if you manage it well, those gains will more than make up for the losses that we will all sometimes experience.
Bottom line: If one of my trade setups makes you uncomfortable, wait for a clear reversal indication on the time frame of your choice -- and take it from there.
For more information about trades and triggers, please refer here.