Stocks are set to gap up this morning… but some of the big questions to ask now are:
- Do we see the same type of volatility as last week?
- Will the uptrend continue or reverse?
With such a long bull market, many people haven’t thought about this… rather, they’ve stuck to the “buy the dip” mentality.
After all, stocks are “always” going up, right?
Well in the long term view, sure.
However, there are a lot of short-term shifts in trends and volatility… and there can be violent moves in either direction.
Your financial advisor lets your money weather the storms and bets on the long term, your 401k is out of your hands.
There is nothing wrong with investing for the long term… but what about all the action in between that time frame?
That, my friend, is where you can take control and profit off short-term trends in your discretionary trading account. This is where the fun is had and big returns are made.
The last thing you want to do is be caught up in the euphoria when everyone is buying – following the herd mentality – and all of a sudden the market cracks and heads lower…
… leaving you stuck holding the bag, trying to figure out how to manage your risk, and whether you should double down – causing you a lot of stress.
However, it doesn’t have to be that way.
What if there was an easy way for you to spot the changes in trends – before they happen – using simple charting tools?
Well, there is… and I am going to share with you three of my surefire ways to spot a trend change, so you can have the same vision as the professionals.
And don’t worry, they are very simple tools and visuals that anyone can use.
With all the back and forth action we’re seeing… it’s time to take a step back and get back to the basics with Trendlines, Moving Average Crosses, and Support and Resistance. It doesn’t take complicated tools or professional analysis to spot trends and changes in trends.
All you need is to do is pull up a chart and overlay some simple indicators. When you do that, you develop a trading strategy that actually works, allowing you to time your entries and exits to near perfection.
We all know the trend is your friend. That’s kind of the point of this conversation. We want to stay on the same side of the market as our friend… the trend.
So what’s a trend?
Simply, it’s the direction of a stock or market’s price over a specific period… and you will generally see higher highs and higher lows in an uptrend (lower highs and lower lows in a downtrend).
You can simply look at a chart and see the trend.
Check out the chart below in Weight Waters (WW). It’s very clear that the price is moving up in the first half of the chart, and down in the second half. To help with analysis, I will show you how to draw the trendline… so you can easily see it.
- Drawing a trendline – Start at the lowest low and draw a straight line under the lows trying to hit the major higher lows. This is an uptrend… as shown in the chart below.
Once you see a stock break below the uptrend line (the blue line), it lets you know that the stock may be running out of steam and could pull back… and that’s exactly what we saw in WW.
That was easy right?
You can do this on any chart and now you have a good visual of the trend. Let’s take a look at moving average crosses.
2) Moving Average Crossover
One of the most popular trading tools is the moving average… and one that I tend to use a lot.
The best thing about moving average crossovers?
They’re a great way to identify the direction… before it happens.
As you can see in the chart below… the two moving averages are moving up in the direction of the trend.
But we have the trendline for that, so I’m going to share a special way to use the moving average to help us spot when the trend is changing… The Moving Average Cross…
What’s a cross? Simply put, it’s when one moving average crosses over another moving average.
In the chart above I have added 2 popular moving averages.
The 10-period simple moving average (blue line) and the 30-period simple moving average (red line). Being a weekly chart the “period” is weekly. So 10 weeks and 30 weeks – this gives you a long-term view of how the stock has been doing.
You can see during the uptrend, the moving averages have some space in between each other. Generally, you’ll see the short-term moving average above the longer-term moving average (10 is short-term, 30 is long-term).
Now, look at the point where the 10 crosses the 30… this is alerting us to a potential change in the trend…
I say potential because they can cross back and forth if the stock price settles in a range for a while. This is why we use all 3 charting tools to increase your chances of success. Next, let’s look at Support and Resistance.
3) Support and Resistance
Support is an area where demand is higher than supply. Therefore supporting the stock price at that level.
Resistance is an area where supply is higher than demand. Therefore creating a ceiling for the stock price.
Stock prices tend to pause and many times reverse at these levels due to the supply and demand imbalances.
Often times when a stock price breaks one of these levels, it then becomes the opposite.
What I mean by that is when a price breaks through a resistance level, it tends to become a support level as the buyers won out and then created higher demand in that area to keep the stock above where they bought it.
Okay, that’s the basic theory…
… but how do you spot key support and resistance levels?
When you look at a chart, you will notice places where a price goes to and gets stuck many times.
Every time it gets there, it can’t quite make a move past. These are the areas of support and resistance. Support being a price range where the stock has had a tough time breaking below and resistance an area the stock can’t get above.
You can look at the chart below and see how I placed a horizontal line through an area where the price had trouble going through on the way up… and when it did, it showed some support at that same level.
Here we have identified an area of support and resistance.
Putting It All Together
Now I am going to show you the magic that happens when you put them all together.
Let’s look at an example.
Below is the chart we have been looking at this whole time to see each of the tools on its own…
… let’s see what happens when we lay them all on the same chart.
What do you see?
Each one of these tools used together gives us a much clearer picture of the trend, and more importantly, when the trend changes.
I am looking for 3 things here:
- Price breaks the trendline
- Price breaks through support and holds below
- The moving averages cross down
Look at the chart again.
You can see where the price breaks the blue trendline that we easily added to the chart.
Around the same time price goes below the support line, notice that the price goes back above it, but fails to stay above, creating resistance there… next, the 10-week moving average crosses below the 30-week moving average…
Once all 3 of these things happen you can see that momentum has flipped and the trend has changed direction.
And what was a trend again?
The direction of the price, generally with higher highs and higher lows (in an uptrend)…
So one last note for verification on the trend… take a look at the chart below for a closer look at the price action…you will notice that as these 3 things all happen, the higher highs and higher lows turn into lower highs and lower lows, thus changing the direction of the trend and beginning a new downtrend.
With the market pullback, recession talk, and global issues all coming to the front, what is next for stocks?
Is the economy actually fine and do we run higher from here?
You don’t have to be uncertain about the trend or if it has changed… you can use these three tools so you don’t find yourself jumping back and forth not knowing.
It’s quite simple, and right now is a great time to put this to use…
Well, with the market volatility, many traders go back and forth because they are trying to guess the trend and if it’s changing… you don’t need to be so jumpy. In my Tranquil Trading system, I share all you need to find profitable trades by spotting patterns using three simple lines… which lets you know where to enter, stop-out and take profits.
Click below to watch me share exclusive details about Tranquil Trading and how it can help you simplify your trading, and allow you to take trades with favorable risk-reward.