Predicting Trend Change

In the last article in this series I discussed on the surface about trend change but lets get into the nitty gritty.  There are a few components that make this happen.

1. Broken Trendline
2. Lower Low and Higher High
3. Re-test and Failure
4. A lower high forms (downtrend) A higher low forms (uptrend)

So by using this method it can be pretty clear as to where we can identify trading opportunities.

1.  Broken Trendline and 

2. Lower Low

 In the chart above we have a broken trendline but that does not yet mean the trend has changed as it could mean that its resting and ready for another move.  One clue that it may be about to change is the lower low that developed but we need to be patient and wait for a couple of more things to happen.

3.  Retest and Failure

4. Lower High

 

This is where it is important to be discipline you need to wait for a retest meaning that in a downtrend there may be a rally that reaches back up to the trendline.  In this case Chevron does rally but because of the big move down its to far away to retest.  In stead it fails and reverses.

The result since that trendline break and lower high has seen Chevron fall all the way down to $102.




For a change in trend to the upside you just need to look at after a break in a down trendline.



First when the trend line is broken it does not mean the trend has broken it may be in the beginning stages.  What happens next strengthens the case for a trend change.  The higher high suggest that there is enough demand in the stock to push it to a new high.  This part is a critical, it must retest or pullback that sets up the trend change.  Once the stock reversed and creates a higher low most likely the trend has changed.

The best places to put on a trade in a downtrend is at the lower high and in an uptrend a higher low.  The other things to think about is earlier in the trend is better.  It just makes sense.