Friday Morning, and Summary Chart Distortion

Dow up 116 as I write this. As you can imagine, not much on my watchlist is getting closer to my entry points right now. Maybe this is just the “up phase” of the day, and this afternoon will be more exciting.

Whether I end up making trades today or not, I will post my weekly summary later tonight, as well as my review of July. I am going to consider July over today, because I’d like to do these reviews at end-of-week.

On Summary Chart Distortion

Akami Technologies, Inc (Nasdaq: AKAM) did press through my 37.40 target, briefly running up to 37.73 before turning around. I didn’t take the trade, though, because there wasn’t a lot of volume behind the move. I wanted to see it bounce back off 37.40 for confirmation. Instead, it fell right through and hasn’t looked back up.

But, while that’s disappointing, the silver lining is that it makes a good example of how daily and weekly charts can be misleading. Lets say the price never recovers today. The weekly charts will still show a new 52 week high happening this week, even though it was just a nothing fakeout move. Do you want your trendlines to be skewed by two minutes of anomalous price action? I don’t! Here’s that weekly chart… see how the three recent peaks seem to be going up?

Some people ignore the wicks on the candles when drawing trendlines and support/resistance lines. In my opinion, that’s just as bad, if not worse. Consider that this weekly chart would look exactly the same if the stock had stayed up at 37.73 for most of the volume Monday through Thursday, and then dropped down to the weekly close in the final minutes of trading today. There’s obviously a big difference between that scenario and the one that actually transpired. So, both blindly observing and blindly rejecting chart extremes would appear to be a mistake.

The only way to tell if chart extremes are significant is to drill down for more detail on those areas of the charts. In this case, going to the daily charts would reveal that it only broke out on Friday.

Then, going to the intraday chart would show the move only lasted a couple minutes on low volume. It’s more effort to do this , but it pays off. Here’s the 5 minute chart. See how it can’t even stay above 37.50 during a single 5 minute candle? Yet, I’ll point out again, it had the same effect on the weekly charts as a sustained four day move would:

This kind of distortion also happens intraday, if you think about it (and, frankly, even if you don’t think about it!). Say you are looking at a 15-minute chart and see a hammer candle. Did it hop up from its lows at the last minute on no volume, or did it grind its way up from the low over the last 10 minutes on consistent volume? The 1 or 5 minute charts will help you discern which case is which.

Here’s the vaguely relevant tinfoil hat portion of the post… All I know is, when I’m watching charts, I see tiny bursts of activity just before the 15 and 30 minute candles close sometimes. When I’m feeling paranoid, that makes me wonder if some of the MMs and Specialists play games with the prices to manipulate how the charts look. That way, people that pull up 15, 30, or 60 minute charts will think they see some bullish pattern that was actually a last-second fake-out move. I suppose a more rational explanation would be that my chart service is not 100% in synch with every chart around the world, and people making decisions on their thirty minute boundary looks like activity just ahead of my thirty minute boundary.

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