Chartists looking to increase their odds should consider two timeframes for their analysis. The longer timeframe sets the strategic tone, while the shorter timeframe defines the trading tactics. Strategically, I am interested in stocks with long-term uptrends. Tactically, I am looking for bullish continuation patterns to trade after a correction. Let’s look at an example using Northorp Grumman (NOC).
The first chart shows weekly candlesticks extending back to summer 2021. NOC advanced from 350 to 550 (+60%) and hit a new high in October 2022. The stock then fell sharply at the beginning of 2023 and proceeded to drift lower into October 2023. Overall, a triangle of sorts took shape as the decline retraced around 61.8% of the prior advance. Also notice that NOC returned to the prior breakout zone. The retracement area and broken resistance created a support-reversal zone (red-green line). NOC broke out with a big surge in October (green arrows) and this move reversed the long-term downtrend.
The bottom window shows the percentage difference between the close and the 40-week SMA. The horizontal lines are at +5% and -5% to filter signals. A move above +5% signals an uptrend and remains until a move below -5%. Notice how the indicator moved below -5% in early 2023 and remained bearish until October 2023 when it surged above +5% (gray arrow). This indicator is also long-term bullish. This indicator is part of the TIP Indicator Edge Plugin for StockCharts ACP.
With the long-term trend up and a breakout on the weekly chart, we can turn to the daily chart for tactical decisions. Before looking at the tactical side, note that we have different timeframes and similar chart setups. Technical analysis is fractal in nature. This means we can use the same patterns, retracements and setups on different timeframes. In this case, the breakouts zones turned into future support zones. After big breakout surges, the subsequent declines retraced 50-61.8 percent of the prior moves. In addition, the declines formed falling wedge patterns with clear resistance levels to watch for breakouts.
Turning to the daily chart, NOC broke resistance around 460 (green arrow) and this area turned into support as the stock fell back after the breakout. Again, this is a classic tenet of technical analysis: broken resistance turns first support. The decline back to the 455-460 area also retraced around half (50%) of the October surge. Again, this is normal for a correction after a sharp advance. Think two steps forward and one step backward. Overall, NOC hit a support-reversal zone (green line).
The blue lines mark a falling wedge to define the downtrend since November. I view this as a correction within a bigger uptrend and am watching for a breakout to reverse this decline. The red line marks resistance at the December high and a breakout here would be bullish for NOC. I would then expect a continuation of the October surge and a move above 500. For reference, the bottom indicator shows the PPO moving above its signal line in early January and turning positive. This is the early signal and chartists can use the January lows to mark re-evaluation support. A close below these lows would negate this setup.
