I posted a variation of this chart yesterday and I was thinking about it last night as to how people would interpret its relevance.
I could construct a narrative that went along the lines of the market is congesting and therefore should opt for not adding to any of my current US positions. Alternatively I could build a case for existing any long daily index position and perhaps generating positions build around short calls. Both of these could be construed as realistic interpretations of the current situation. However, if you are a portfolio investor how does this chart help you? how does knowing the Dow was up 43 last night change the trajectory of your big picture?
Consider the chart below – I have created the largest channel I could reasonably place on the chart.
From my perspective generating a longer term chart generates context to shorter term moves – it may not invalidate any conclusion based upon short term gyrations but it does give a better picture. For example lets assume you are long a US ETF and have been for perhaps years as you ride the current US bull market, does knowing what the Dow did overnight or which were the worst performing stocks of the last week make a difference to this basic position or is it just noise that you subject yourself to. This returns us to the age old question of what is noise and what is information – for the majority of traders most of what they hear is probably noise and as such adds very little fidelity to their decision making.
As a personal example – I am currently short the AUD/USD and last session it showed a degree of reluctance to hold below $0.90 but to me this perturbation is actually of minor consequence since placed within the context of my trade it is noise.. Prices go up and prices go down and they will continue to do so without any influence form me. Likewise, some trades will be winners and some will be losers.