When looking at the markets, its incredibly important to assign a filter process to better understand what the larger picture is showing vs. the smaller picture. This will obviously provide you with the path of least resistance but also help you understand what the market is attempting to do overall. For example, when determining the market’s overall state, what would be best used to see that? An intra-day chart or a bigger picture chart such as a Monthly bar chart? Sure, an intra-day chart will give you immediate information but it won’t tell you what the overall market is attempting to do. The important thing to remember is big money moves more in step with what the bigger picture is telling us which is why its so important to have a sense of what is happening on this level.
So the hierarchy I like to assign to my top down filter process just from a pure bar chart periodicity is the following:
1. Yearly Bars
2. Quarterly Bars
3. Monthly Bars
4. Weekly Bars
5. Daily Bars
6. Larger Time and Volume based bars such as 240 minute (4 hours), 500k volume and 100k volume. These vary based on each market but for this example, we will use the ES and SPX (cash index).
Here’s a comparison of the hierarchy I’ve just outlined using the S&P 500 cash index:
As you can see, the context of each period provides you with different references as you zoom in closer but it also helps you identify the path of least resistance. So with that being said, I will walk through in the coming sections, how I actually interpret this information and use these time frames in a top down analysis using various tools and concepts to gain a sense of what the market is doing. Although this first section is very general and short in explanation, the importance is key and I highly recommend you revisit this hierarchy going forward.