Mastering the secrets of the monthly cycle: Building a robust investment system using multiple timeframes

Many investors are often confused by short-term fluctuations when trading stocks, frequently entering and exiting the market but unable to grasp the overall trend. The root of the problem lies in a lack of understanding of multiple time cycles. Besides fundamental analysis (such as corporate profitability and growth momentum), we also need to utilize technical tools like weekly, monthly, and quarterly lines to accurately determine buy and sell points. This is also a key difference between professional investors and retail traders.

Understanding the Essence of Different Cycle Lines: Starting from the Daily Moving Average

In technical analysis, indicators like weekly, monthly, and quarterly lines help us track the average purchase cost of investors. Simply put, they are moving averages calculated based on closing prices over a certain period.

Taking NVIDIA (NVDA) as an example, if we calculate the average of the closing prices over the past 5 trading days:

Closing prices from March 20 to 26, 2024: 903.72, 914.35, 942.89, 950.02, 925.61. Summing these and dividing by 5 gives 927.318. As each day’s closing price updates, this average also changes. Plotting these consecutive averages forms a weekly chart.

The number of trading days corresponding to different investment cycles are as follows: 5 days for one week, 10 days for two weeks, 20 days for one month, 60 days for a quarter. Based on these data cycles, we can further classify:

• Short-term indicators: 5-day and 10-day moving averages (suitable for short-term traders)
• Medium-term indicators: 20-day (monthly line), 60-day (quarterly line)
• Long-term indicators: 120-day (half-year), 240-day (annual line)

Short-term traders focus on the interaction between the 5-day and 10-day lines, while medium- and long-term investors pay more attention to the performance of the 20-day monthly line and the 60-day quarterly line.

Practical Application of Monthly and Quarterly Lines: Understanding the Meaning of Price Position

The first step in assessing buy safety is to observe the position of the stock price relative to various cycle lines. When the stock’s price remains above the 5-day, 10-day, 20-day (monthly), and 60-day (quarterly) lines throughout a trading day, it indicates that investors who bought during the past week, two weeks, month, or quarter are all in profit. At this point, the stock is in a relatively strong position, and the risk for new investors is lower.

Conversely, if the stock price consistently stays below these averages, it means that buyers across these cycles are in loss, selling pressure will gradually increase, and the stock faces further downside risk.

Golden Cross and Death Cross: Mastering Trend Reversal Points

Among multiple moving averages, important signals occur when short-cycle lines cross long-cycle lines:

Golden Cross occurs when a short-term line (e.g., 5-day) breaks above a long-term line (e.g., 20-day monthly). This indicates strengthening short-term buying power, market participants are generally in profit, and the trend is turning upward—an entry buy signal.

Death Cross is the opposite, occurring when a short-term line crosses below a long-term line. This suggests short-term sellers are dominant, most investors are facing losses, and the trend is weakening downward. Consider reducing positions or exiting.

Arrangement Patterns of Moving Averages: Bullish, Bearish, and Consolidation Signals

Moving averages are not just used individually; their relative arrangement conveys market conditions:

Bullish Arrangement: All cycle lines slope upward, arranged neatly from short to long in order. This indicates the stock has completed a bottoming process and is about to start an upward trend, suggesting a good opportunity to position.

Bearish Arrangement: All lines slope downward, arranged from long to short. This signals a downward channel, with higher risk of decline—avoid new entries or consider stop-loss.

Sideways Consolidation: All moving averages are horizontal and parallel, reflecting a balance between bulls and bears, with no clear direction. Investors should wait patiently for new signals.

Choppy and Intertwined: The lines cross and intertwine, indicating market participants have diverging views, with ongoing tug-of-war between bulls and bears. Pay attention to whether positive or negative news catalysts can break this deadlock.

Limitations of Monthly and Other Cycle Indicators

While monthly, quarterly, and other cycle lines provide valuable trend references, investors must recognize their inherent flaws:

Lagging Risk: These indicators are based on past prices. When a trend changes, moving averages react slowly, often lagging behind. Investors may miss the optimal entry or exit points.

Interference from Sudden Volatility: Major data releases or black swan events can cause sharp price swings in the short term, generating false signals on averages and misleading decision-making. Exercise caution around key economic data releases or corporate announcements.

Practical Recommendations: Building a Multi-Cycle Confirmation System

An effective investment strategy should integrate information from multiple time cycles. Short-term lines offer precise entry and stop-loss points, while monthly and quarterly lines help confirm the overall trend direction. When signals across multiple cycles align, the probability of successful trades increases.

Additionally, recognize that technical indicators are auxiliary tools; fundamental analysis, risk management, and psychological discipline are equally important. Combining monthly line analysis with other technical tools and fundamental data can help build a truly robust investment system.