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Trend Reversal Watch

May 23, 2010 by 3 Comments

I am on a trend reversal watch in equities and major indices alike. I am specifically looking for the classic 1-2-3 setup or as mentioned last week, a Dow Theory confirmation of a trend change.

I am watching the major indices for a reversal pattern setup. For example, the NASDAQ and DOW have both violated their long term trends but they are yet to establish a definite “minor low” and then a failure to close above the previous high.

Let’s see if the NASDAQ and DOW will continue to form a chart similar to BLK.

052310_BLK_wkly

Do not jump the guy and start shorting before the SIGNAL is given. Be patient, these patterns can take months to confirm.

We are looking for point #2 and point #3 to confirm before establishing a short (trend reversal position).

Point #1 has confirmed but that is not enough to place a short position, the risk is still high as the odds have not been confirmed in our favor. Without confirmation, the market could move higher which will lead to unnecessary losses.

052310_COMPQ_wkly

052310_INDU_wkly

Back to Victor Sperandeo’s book about the 1-2-3 setup:

At the point where all three of these events have occurred graphically, there exists the equivalent of a Dow Theory confirmation of a trend change. Either of the first two conditions alone is evidence of a probable change in trend. Two out of three increases the probability of a change in trend. And three out of three defines a change in trend.

Three out of three defines a change in trend : that is what I am looking for. At that point (if it happens) is when I will short and short heavily!

Lastly, keep in mind that this 1-2-3 pattern also works for reversal to the up-side:

052310_QID_wkly

Filed Under: Uncategorized

Trader Vic 1-2-3 Trend Reversal Pattern

May 17, 2010 by 8 Comments

Blackrock (BLK) setup what Trader Vic would term as a 1-2-3 setup or a Dow Theory confirmation of a trend change.

051710_BLK_wkly

As you can see:

  • BLK broke the up-trend after establishing a new 52-week high above $242.
  • From there, it consolidated and formed what is referred to as the minor sell-off.
  • Prices stared to rise but failed to make another new high. This test of the previous high failed near point number 2.
  • A failure to make a new high is usually (not always) a signal that the trend is about to change.
  • Finally, we reach point number 3 where prices went below the previous short term minor sell-off (this is trend reversal and the signal to short). If missed, you can short on the first failure to recover the major moving averages (or #3 area).

In addition to the 1-2-3 setup, the stock has also allowed its 10-week moving average to cross below the 30-week moving average with typically signals a change in trend when both lines are starting to point down.

Victor Sperandeo says this about the 1-2-3 setup:

At the point where all three of these events have occurred graphically, there exists the equivalent of a Dow Theory confirmation of a trend change. Either of the first two conditions alone is evidence of a probable change in trend. Two out of three increases the probability of a change in trend. And three out of three defines a change in trend.

Take a look at the picture I scanned from Sperandeo’s book on page 76:

092607_123_book

This is essentially the pattern I am watching for in several of the stocks starting to churn (run out of steam) that I posted to my twitter stream. However, have patience and be prepared to sit on the sidelines for a while as this pattern takes time to build and then confirm (nearly four months for BLK).

Twitter stream for 5/17/10 (stocks down on heavy volume, trading near 30-wk): $PCLN, $GMCR, $V, $MA, $TCK, $BUCY, $BTU, $MR

Recent Tweets on BLK:

  • 7:33 PM Apr 6th via web: $BLK – 198.55, clearly falling apart (but gap down has to fill before ultimate slide).
  • 10:02 PM May 5th via web: $BLK…Trading @ 174.80 & going down!

This is a game of odds with developed expectancies so take the trades and follow the rules.

Filed Under: Selling, Shorting, Technical Analysis

NYSE New High New Low Extreme

April 25, 2010 by 13 Comments

The market closed last Friday registering the second most New High’s (NH’s) recorded in a database that I have going back decades. At 634 NH’s, it’s the most new highs registered on one day in almost 30 years. More than any one day during the dot com boom of the late 1990’s, more than any day recorded during the run in 1987 and more than anything this millennium.

Only one other date surpasses Friday’s total: Monday, October 11, 1982 when the DJIA closed at 1,072.79. The market recorded 653 NH’s, 7 NL’s, 1,504 advances, 292 decliners and “up” volume outpaced “down” volume by an almost 10-1 ratio.

The NASDAQ closed at 202.31 on the same day with 418 NH’s, 14 NL’s (not even in the top 10 for the highest number of NH’s ever recorded). Do note this: the highest NASDAQ reading ever came later that year on Thursday, November 4, 1982 with 525 NH’s (following that week’s election day).

042510_NH-NL_NYSE

So what does this all mean? Well, by mid-1983, the market surged higher by 20%. It continued to move higher until the crash in 1987 but long term, the market is up well over 10-fold since this NH extreme.

How about today’s market? I can only tell you this: we are in an up-trend as of today and until the market breaks that trend, do not try to “guess” when it will reverse.

I have my “opinions” of the market but as you all know, we must trade what is actually happening, not what we think should be happening. Yes, I am concerned the market would like to correct longer term based on poor economic policies, tremendous debt levels, a depreciating dollar and most important: possible inflation. But, until we get the true catalyst, trade what the market is telling you.

The 634 NH’s represents an extreme in the market and I will be watching for further catalysts. How long can this market sustain higher stock prices based on faulty growth? You can only take so many cash advances on your credit cards without paying before they cut off your borrowing capacity. Maybe I have it all wrong but I am concerned long term. Short term, the market is higher unless it says otherwise.

I leave you with this: the vast number of “gap-ups” in stocks making new highs concerns me. Do they want to fill? If so, we will have an almost endless supply of high quality shorts to trade.

Chart provided courtesy of www.Decisionpoint.com

Filed Under: General Market, NH-NL Ratio

Gold Chart Update

February 28, 2010 by 9 Comments

We are seeing lower highs and lower lows for $GOLD and GLD:

022810_GOLD_daily

022810_GLD_daily

Filed Under: Commodities

Gold Reversal

January 25, 2010 by 3 Comments

Gold looks to be reversing, the confirmation is a move below $1075.00. A drop below that number could take it towards $1,020.00 and then $1,000.00.

How did I determine that? A new high, a failed high and now a challenge to the minor low (see chart for visual). It’s essentially a Dow Theory reversal setup.

012510_Gold_daily

Filed Under: Commodities
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