Is It Really Extended?

[PristineTrading 10]

 

The chart and question shown was posted at the Pristine Facebook Group. Below is my posted answer.

 

The concept of being extended is difficult for most, if not everyone at some point for several reasons. I will discuss reasons generally and then in some detail. However, a complete understanding can only happen in class, but let's start here.

 

Extending means stretched out and suggests a return to a more "normal position." However, to most technical traders and investors, the word extended invokes the belief that the trend is close to over. Being extended has little to do with trends ending. Actually, extended initially suggests that the trend will continue.

 

The first step to clearing up the difficulty to understand extended is to realize that most taught methods of defining extended are based on completely subjective measurements. These have little to no consistency to define the end of a trend. Many times, they don't even result in a retracement to a believed normal position. This leads to confusion and of course a lack of confidence in the method. Exactly, what the question is communicating in the example using a moving average (MA) as a measure.

 

There are various technical tools to measure extended, but we'll discuss MAs now since that is what was used. As with all technical analysis tools there are choices to using them like the settings. Different settings will give different signals or measurements and then setup different beliefs based on them.

 

For example, if we use a simple 20-period moving average verses an exponential one we will see those MAs at different levels. Which one is the right one? Prices may appear to be extended from the simple type since it moves slower than the exponential.

 

What if we use a 10-period moving average instead of a 20-period? Prices may appear to be extended from the 20-period, but they are not from the 10-period. The 10-MA is averaging in the more recent prices were as the 20-MA is also averaging in the older prices as well and will be slower and further away.

 

Depending on what you have been taught or read, you will have a different set of beliefs about what is extended and possible. If you are convince to change the MA type or length, your beliefs change. Soon you'll be second guessing all of them. Been there?

 

Next, I am sure you have seen what is seemingly extended in one time frame that is not extended at all in another. For example, the 5-minute time frame may appear extended, but the 60-minute move has just started. In an example like that, traders focused on the 5-min. can be fearful of continuation patterns or breakouts and require a retracement. However, retracements often do not occur leaving those watching see the move become more extended. In fact, the chart and question is how to handle such situation. Without an understanding of how to interpret and combine multiple time frames anyone would be confused.

 

Lastly, and this comment is likely to raise a few eyebrows, but addresses a deeper understand of what the question relates to. The belief that prices are extended - even in a higher time frame - and that a trend is unlikely to continue is false. It will leave you scratching your head as you watch the extended prices become even more extended.

 

Here is the key and what I hope is a light bulb moment for you. Historically, prices will continue trended higher until the Pristine Price Void (PPV) is closed, Major Support (MS) is violated or resistance is created. In other words, there is no objective reason to think the trend will end, so don't.

 

Pristine Trend Analysis is based on the concept that a trend will continue to a price reference point were traders will sell at. Without that reference point (a Void) to sell at, traders are just guessing at what is extended and where the trend may end. I wrote about this in a Chart of the Week (COTW) titled, "You Have Been Setup to Fail as a Trader."

 

The distance to a moving average alone is incomplete information and misleading. Adding additional indicators like oscillators will add to the confusion. There are hundreds of these indicators to choose from and when you add the choices of the settings possible, the combinations are endless. It's no wonder why there is mass confusion about technical analysis based trading.

 

Clearly, extended is a subjective idea if based on a single concept like the distance to a moving average. Students of the Pristine Method® learn to use Multiple Time Frames, Trend Quality, Relative Strength and Weakness, Support, Resistance and the lack thereof (Pristine Price Void), the influence of the Market or a Sector, Market Internals, Inter-Market Analysis and others. There is a lot to learn to become a professional in any field and technical trading/investing is no different.

 

If you are trading stocks, a futures contact like the S&P 500 e-mini, a commodity or a Forex currency pair based on generally accepted technical analysis tools. Odds are that you are thinking that there is no way you will ever understand price movement. You can and it does not have to be complicated. However, it does require the right education.

 

 

 

All the best,

 

 

Greg Capra

President & CEO

Pristine Capital Holdings, Inc.