I’m always annoyed when I see something like this (from yesterday’s Yahoo Market Overview):

9:40 am …a sense that a bottom has finally formed following a week of aggressive selling pressure gives stocks a sizable boost right out of the gate.

The big lie is that after only 10 minutes of trading the author of this tidbit claims to see market behavior that is significant enough to cancel out the entire last week‘s worth of selling.? (Technically two weeks of selling, but the largest down moves were last week.)

What is happening? The author is mixing multiple time frames to try and draw comparable conclusions. Anyone can do it by accident, including me, but those tasked with commenting on the markets for the financial press seem to do it with alarming frequency.

Remember that we can observe the same phenomenon on many different time frames… We can see a bounce from a low on a daily time frame, monthly, yearly, etc. When trying to understand if a week long selling spree is over, we really need to see several days, if not a week, of strength.

One of the many important concepts of trading is to be aware of your time frame. It’s easy to be distracted by the action of the last 5 minutes (the prices keep changing after all!), but if you invest over longer time frames (months and years) then a one day bounce (or dip) is not usually significant.

What would be significant?

  • Bullish Significance – Several days of buying on good volume, with a general upward trend. A series of higher lows when the market does have a down day or series of down days.
  • Bearish Significance – Failure of the NDX‘s ability to climb above 1750 (a very short term target) and lower volume on up days like today.? A series of lower lows and lower highs…