"Talk about not clued in, I didn't even know if I was moving or standing still." - Haruki Murakami, from the novel Hard-Boiled Wonderland and the End of the World
The difference between moving and standing still really is just a matter of perspective. One person's breakout is another person's noise. This is why defining your time frame, before you take positions in financial instruments, is so critical.
Suppose that I am driving a car. This requires a certain level of competency, an ability to respond to changes in the road, and an awareness of my surroundings, but not too much of an awareness. I must filter out the noise. A pebble on the road is noise. A twist in the road is not noise. A piece of paper stapled to a utility pole describing a missing dog is noise. A stop sign next to the utility pole is not noise.
Markets work this way as well. Discerning between noise and activity that requires a response is very important. Point and figure charts are the filters I use to sort through market noise. But even these filters will vary with my time horizon. Maybe it's similar to the difference between the noise levels a driver filters while creeping along a crowded city street at 10 mph, as opposed to cruising down an interstate highway at 70 mph.
Here are two examples with charts. The first is Fannie Mae (FNM:NYSE). The chart below of FNM is a 1x3 point and figure chart. Today, a buy signal (when one column of Xs exceeds a previous column of Xs) occurred at 66. Is this just noise? It depends on how fast you are driving. Let's look at another chart of FNM.
This is a longer-term 2x3 chart of FNM. What is 66 on this chart but noise? On this chart, a buy signal would not occur until the stock hits 74. The chart would not even reverse to Xs until the stock hits 68.
As you can see, the question of which chart you give more weight depends on how far and how fast are you driving.
Let's look at another example with the S&P 500 (SPX). Again, the 5x3 chart below of the SPX shows how important 1020 is as a key level. Certainly, if the SPX ticks at 1020, it would signal a break of the trading range we have been in since June. Is this just noise? Let's expand our horizon a bit.
Below is a 20x3 chart of SPX. The longer-term picture of SPX is that of an index that has traded below a downtrend line since February of 2001. (Note: the trend line that was violated in February of 2001 had been intact since the early 1980s.) This chart is already on a buy signal, but below the trend line, and downtrend resistance will come into play in the 1060 area.
For some market participants it is vital to capture those 40-50 potential points, if they are indeed out there. For others, those 40-50 points on the SPX are little more than a lane change on the way from New York to Florida on 95 South. This doesn't make one chart better than another, or one view more important. It's simply a matter of perspective; one chart is moving, the other is standing still.
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