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Indicators to hint of trend reversal
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trading_coach
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07-Jun-2006 14:23
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Hi Patricksoon, As you are new to TA I will try to make this posting as simple as possible: Firstly we need to define what is a "downtrend". On a weekly bar chart, I define a confirmed downtrend as 11 consecutive weekly bars of downward movement. Within those 11 weeks you may have some short uptrends but the overall pattern is down - therefore you have something like lower peaks and troughs. Look at the weekly bar charts for Hyflux (end July05 to present) and also Creative (mid Jan06 to present) as these are good examples of downtrending stocks. Why 11 bars? Because my backtesting shows me that anything less can be a shorter period of consolidation within a stock or just sideways movement and the confirmation of trends is much more useful because it is difficult to make money from a sideways movement. I then attempt to draw a downtrend band across the top of the downtrend - this is a band with a width of about 1.5% of the stock value which can join the major peaks within the downtrend. My charting software has a tool to help me do this, and there are several other criteria for drawing a valid downtrend band or uptrend band. While there are several criteria to look at, the most simple I use to identify a reversal (back up) from a downtrend is 2 consecutive weekly closes above this downtrend band with the 2nd of these 2 weekly closes being high than the first - this points to a potential turnaround in stock from a downtrend to an uptrend. Please don't take this as "BUY" advice from me, because there are lots of factors involved but this kind of breakout from a downtrend is often a good sign of a new trend. There are several other ways to look at reversals, including use of candlestick charts, looking at the volume changes in a stock, the use of countertrends as confirmation etc etc, but for now I suggest that you look at reverals in the context of longer periods of time (ie on weekly bar charts where there has been 11 bars/weeks of upwards or downwards movements) and where the stock the breaks out of this patterns and turns around. It is difficult to find stocks as examples that are just turning around from a downtrend (using weekly charts) at the moment, but looking at it the other way, Singtel is a good example of a stock that was in an uptrend, and with a valid uptrend band (from late Oct05 to mid May06) but during the week ending 26 May it broke out of this uptrend and started to head south, therefore suggesting the possibility of a new trend (ie down!) Confirmation of this trend is another matter so I just say possibility for now. Hope that helps. |
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patricksoon
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07-Jun-2006 13:28
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I have heard and read many people say that it may be a good time to bottom fish/start nibbling/ etc. ?. And hopefully there maybe a rebound.
From a FA point, following the stock gurus, anytime is a good time to buy provided the fundamentals are sound - there is no point to time the market.
I am new at TA and would like to ask experienced TA practitioners What indicators to look out for in a shaky downtrend phase to hint a trend reversal?
Thank you and Cheers. |
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