Thursday, January 19, 2012

Trend breaks do not imply reversal

A trend break implies just that: The trend is no more. A reversal of the prior trend needs certain other things to happen. Even a trend break(b31-39) and a test of the prior high (b47) does not imply an imminent reversal. Often in a bull move on the daily chart, intraday moves are often bull trends that break and turn into a horizontal trading range. Today, after the trend break at b39, the price action turned into a series of fBOs that are typical of horizontal trading ranges.

In addition to a two or three legged test of the extreme after a trendline break, average sized, non doji bars are a good indication of a possible reversal. The abundance of doji bars indicates that any breakout (b53) is likely to fail and move back into the range (b54,55). The best entry would be a possible LH after a LL (b56).

Usually, on a small day, its best to stop trading after a trend break if the bars are dojis. Trading ranges are dangerous when the bars are small and you may need to use money stops instead of price action stops. The highest probability trades are usually in the AM and you should always look for a decent 1Rev or 1PB when the daily chart is in a bull mode since you may be unable to trade profitably in the PM.

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