Trend Reversals
Stockscores.com Perspectives for the week ending September 8, 2006
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Stockscores Alberta Events
Stockscores is planning events for September and October in Calgary and hopefully Edmonton. Details will be available next week, but tentatively look for the following:
Stockscores Calgary Club Meeting
Wednesday Sept 20 - 7:00 pm
Stockscores Seminars
Edmonton Sept 26
Calgary Sept 27 and 28
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In this week's issue:
Emotion in the market creates opportunity because emotional investors make mistakes. Greed makes investors pay too much while fear motivates them to sell for too low a price. One way to make money is to short the stocks that are guided by greed and buy those whose price is influence by fear. But how do you know when emotion is affecting share price?
The opinion of the market can be read from a stock chart by looking at the direction of the trend. The emotion of the market can be read from the slope of the trend.
If you have a long term, linear upward trend then you have optimism. If the trend moves from being linear to parabolic (from a straight line to a curved one) then you have emotion. Greed is at work.
Monitoring volume during a trend is also important for measuring emotion. Typically, volume will increase as the upward trend progresses, culminating in a high amount of volume as the emotion reaches a crescendo and just prior to the emotional trend reversing.
But how can we anticipate a trend reversal? The easiest ways is to look for emotional (curved) trends that break long term support and resistance trend lines. An emotional trend is a fragile one, built like a house of cards. If an emotional upward trend line is broken it is likely that the foundation of the trend will crumble and the stock will suffer a pullback. An emotional downward trend will tend to end when the long term trend line is broken to the upside.
It is important to remember that we have to have emotion in the trend, the trend has to move from being linear to parabolic and then support or resistance will some how signal an emotional shift. The break of the trend line will usually be with abnormal price and volume action.
Here is an example that will help you understand. Open up Stockscores.com and look at the chart of GOLD by entering the symbol GOLD in the Get The Stockscores box at the top of the page. Switch the chart to Large View and then click on the Print Chart link at the bottom of the page. This will bring the chart of GOLD in to its own window. Change the chart time frame to one year using the link at the top of the page. Right click on the chart and select Print Picture.
Now you have a printed version of the chart that you can draw some lines on.
When does the trend get really steep? From about the third week of March 2006 until the first week of May, right? Draw a line across the bottoms through that time period. Notice that the upward trend line you have drawn is broken on May 11 at about $25 a share. One month late the stock has fallen to $17.
So, for upward trend line breaks we look for the curving upward trend to be broken as the slope of the line gets steeper. However, fear and greed work in different ways so the turnaround from a downward trend is actually the opposite. Downward trends will start fast and the slope will flatten over time until the trend line is broken.
Look at the chart of SEAC, using the same process to print out an eight month chart as it will show best.
Now, play a game of connect the dots where the "dots" occur each time the stock tried to go up in the midst of the longer term downward trend. Connect from the third week of February to the top of the rally in the first week of March. Connect the top of the first week in March to the top of the rally in the third week of April. Join the April high with the spike up in the first week of June. Connect June to the mini jump in the first week of July. Connecting July to mid August will be a horizontal line as the curve continues to flatten. See how the curve starts with a steep downward trend and slowly transitions to an upward trend?
That means that the cycle of upward to downward trends look like a bell shaped curve. Upward trends start slow and end going up very fast. Downward trends start fast and slowly flatten out.
Now, think about human emotion. Greed takes time to build; we tend to ignore good things until we have heard about them so much that we can't ignore it any more. That is why rookie investors buy stocks at their top, why magazine covers proclaim bull markets as they are ending. When the masses know about it the stocks shoot up the fastest but also set up for the hardest fall.
Fear is a sharper emotion, we tend to panic quickly rather than ease in to being scared. Fear starts fast and carries momentum that takes time to reverse. Like a freight train, it takes time to reverse downward trends so they tend to slowly change direction at their bottom.
Opportunity comes from entering a trade when the trend is reversing. Look for the trend to go parabolic and then a break of the trend line as a cue that the reversal is occurring.
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The Sentiment Crossover strategy looks for stocks that have long had their Sentiment Stockscore indicator below 60 but is now crossing above 60. We look at the chart to see if the downward trend has gone parabolic at the bottom (from a steep downward trend to a flatter downward trend) and then look for a break from a rising bottom on the chart. When we see this, we plan to buy with a stop at the bottom of the consolidation before the break. I ran this strategy this week and found a couple of stocks that look good for downward trend reversals.Back To Top
1. T.CUX
T.CUX is breaking from a short term ascending triangle pattern after suffering an emotional sell off a few months ago. The stock had strong volume Friday as it broke out from low volatility; I think it has good potential to move higher from here provided support at $6.90 is not violated.
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2. KLIC
The pace of the downward trend has fallen on KLIC and it is now breaking to the upside from a rising bottom consolidation making it look like it is starting a new upward trend in the long term cycle. Support at $7.50.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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