Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis

CHAPTER 5

Early Trend Reversal Warnings

A trend remains in motion until there are clear signs that it has changed direction. While we cannot predict precisely when a change in a trend's direction will occur, a trend can be monitored in order to identify the turning points, and often relatively quickly. There are technical tools and techniques at our disposal to help chartists spot potential trend reversals.

When an intermediate- or long-term trend changes direction, it seldom occurs without some type of forewarning. An exception for individual stocks is when news is released that has an impact significant enough to reverse the trend. However, in some cases the news is an earnings release and traders have the opportunity to exit, or hedge their position, prior to such an announcement if their trading rules dictate (as mine do).

There are often warning signs that a trend may be weakening prior to the actual shift in direction. You just need to know what to look for, and that is the focus of this chapter. There are also some signals that may occur later, after a trend change may already be under way, which are covered in Chapter 6.

Don't fight the trend, but neither should you be caught off guard if a change in the trend direction occurs. Learning to spot the early warnings listed in Table 5.1 allows traders to be proactive in their decision making. In addition to defining and illustrating these early warnings, at the end of the chapter I include some tips on how to respond to them. ...