Change In Trends
This is one of the most important parts of the all about trends style. After all if you are Long you need to know when to get out right?
Eventually all uptrends change trends. After all if you are short you need to know when to get out right?
Eventually all downtrends change trends.
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In markets that are changing trends either from up to down or down to up there are main patterns on each side of the trend that we scan for.
In this case from up to down
After a period of being in a clearly defined uptrend as evidenced by the stock trading above the Green line there came a time where the uptrend was changing trend from up to down. If you were long this issue that trendline break to the downside told you all you needed to know to get out and lock your gains. If you were looking to sell this issue short that break of the Green uptrend here too told you all you needed to know in order to consider taking a position on the short side by selling it short with a protective stop loss.
Here's another great example. This issue put in a double top (red line), then broke the pink upward trend line. That was your first short-sell opportunity.
Then it tried to recover as shown by the pink lines. We call those Pullback Off Lows patterns. A break of the pink lines is the trigger point for additional short-sell trades.
The chart is an example of just the opposite , that being after a period of being in a clearly defined downtrend as evidenced by the stock trading below the Blue line there came a time where the issue was changing trend from down to up. If you were short his issue that trendline break to the upside told you all you needed to know to get out of the short side. If you were looking to buy this issue that break of the Blue downtrend told you all you needed to know in order to consider taking a position on the long side with a protective stop loss.
Following is another great example. After being locked in a downtrend, NEM formed a double bottom as shown by the red line. This is your first clue that a change in trend could be near.
The blue boxes represent what we call "The First Thrust Up". Your first trade on the long side is the break above the pink line (second blue box). And now, it's all about seeing the stock establish a new uptrend pattern.
When this happens, we want to take additional long side trades as it Pullsback Off of its Highs as shown by the second pink line. A break above the line triggers a new long side trade. See the uptrends album for more information and examples of how to trade uptrending patterns.
With each of the above issues if you look close each of them had a signature early warning alert pattern commonly referred to as a double top and double bottom. The "Double Top" and "Double Bottom" pattern can take place over various time frames, for example, 10-day one minute charts, or 8-year monthly charts. They can show up at all-time highs (Tops) or at correction lows (Bottoms) In order to give you a better idea as to what these look like visually, let’s take a look at some.
In the case of DRYS this issue was in a clearly defined uptrend as evidenced by being above the Green uptrend line and trending higher. However there came a point in time where this issue started to have trouble maintaining that uptrend and started to put in a Double Top (Red Lines) Those red lines were your early warning alert system telling you this issue MAY be about to change trends from up to down.
The above one is of the same company but the only difference with this one is it is of the continuation variety.
In summary, identifying "change in trend" patterns involves knowing what a Double Top pattern looks like from a visual standpoint. The Double Top is your early warning alert system letting you know in advance that a change in trend MAY be about to occur, in this case from up to down. That is why it’s important to know what the overall trend of the stock is. It’s why we draw trendlines! They help keep us focused upon trading in the direction of the overall trend. Its why and how we let the stocks tell us what to do through the action they exhibit.
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