How to Determine When a Velocity Downtrend Is Reversing
Technical and Retail
Traders need to be able to identify Reversal Patterns during a downtrend in
order to avoid huge losses on selling short trades, and to be prepared and
ready for early entry in the reversal of the trend. When a downtrend concludes
with a V exhaustion pattern the extreme selling reverses suddenly, as stocks
drop into the Buy Side Institutions Dark Pool Buy Zones™ where Time Weighted
Average Price TWAP orders trigger automatically reversing the trend suddenly,
even mid-day.
Many times Technical
and Retail Traders are either waiting out the downtrend as they do not Sell
Short, or are Selling Short without adequately preparing for the inevitable end
of the downtrend.
The faster a stock
falls and the steeper the Angle of Descent™ then the faster it will rise, once
it enters a Dark Pool Buy Zone.
Candlestick Reversal
Patterns include Hurdles, Pole Vaults, Engulfing Whites, Springboards, Reversal
Upside, and the Sandwich are a few of the most common and most reliable candle
patterns that form in the automated stock market today.
Reversal Indicators
include Volume above average, Volume Surge caused by Professional Traders not
High Frequency Traders HFTs, Volume Downside Exhaustion Pattern, Dark Pool
Shift of Sentiment™ and Volume Oscillation Extreme Downside Spike, as well as
Extreme Flow of Funds. These patterns are some of the most common and most
reliable confirmation reversal indicator patterns that form today due to the
automation of the market, variety of venues, and plethora of professional order
types that are not available to Retail Traders.
The combination of
reversal candle patterns with reversal indicator patterns as confirmation,
provides the optimal reversal analysis. Identifying Reversal Patterns provides
early entry into the run and most gain potential.
The chart example
below of EOG Resources, Inc (EOG: NYSE) recently had a strong reversal candle
and indicator confirmation pattern. It has moved approximately 5 points since
the reversal pattern formed.
In this chart example
the candlestick as indicated by the red arrow, is a Reversal Upside entry
signal which requires:
1. Tail or “lower
shadow” must be 3 times the length of the body of the candlestick.
2. A gap down on the day
that the Reversal Upside formed.
3. Confirming indicators
that this is a true reversal and not a Bounce or Buy to Cover.
Confirming indicators
for this chart example are the following, with red arrows in the chart windows
showing the confirmation:
1. Volume Exhaustion
Pattern to the downside, which is the red bar spiking to the top of the volume
indicator chart window.
2. Crossover of
Accum/Dist indicator in the middle chart window.
3. Money Flow Index MFI
indicator in the bottom chart window with a Positive Divergence.
Identifying true
reversal signals early provides lower risk entries with higher points gain, as
most velocity exhaustion patterns reverse with stronger upside velocity action.
Often HFTs will also trigger, moving price up further or causing a gap
up.
Summary
Reversal Patterns for
the modern automated stock and options markets are different than the reversal
patterns of just a few years ago. This is due to the plethora of trading venues
and order types available to the professional side of the market and the
institutions.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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