The Profitable Secret to Spotting Trendline Breaks
Oct 12th, 2009 | By David Grandey | Category: Featured, Technical Analysis
What if you could spot when the market’s trend was about to change before regular investors had a chance to act? With trendline break patterns added to your technical analysis arsenal, that’s exactly what you can do. Here’s everything you need to know to profit from this professional trader’s secret tool…
First, though, let’s take a look at where the markets are headed in the coming week.
The big questions early this week will be: Was that it, and is it time for a pullback? Or are we headed to the next level of short-term resistance — the blue “Post Fed emotional reaction levels” shown below?
If we do either and pullback in a convincing move, two things become clear: Resistance has been hit and a double top may have formed.
The flip side of that is a breakout, but while we’d love to take advantage of any short-term rally, signs point to a breakout being the least likely scenario.
The most significant things we can look for right now are changes in patterns, namely double tops and double bottoms. These reversal patterns signal that the market’s broad trend may be reversing, and give us the edge we need to adjust our positions accordingly.
The “trendline break” is another incredibly important reversal pattern that many traders aren’t as attuned to. That’s because spotting trendline breaks is more difficult than pointing out an obvious pattern like a double top.
That said, here’s what you need to know to catch the market’s next trendline break…
After a period of being in a clearly defined uptrend, as evidenced by the stock trading above the green line, the uptrend began reversing from up to down. If you were long this stock, 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 short position with a protective stop loss.
In the chart above, a nice uptrend puts in a double top and breaks its uptrend to the downside. This is what you want to be on the lookout for from here on out if the current indexes follow their script.
Below is an example of just the opposite – a reversal from a rally to a downtrend. If you were short this stock, the 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 shares of Baidu.com (NASDAQ: BIDU), however, 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.
There’s an important formula to spot a trendline break…
With both of the above trades, each had a signature early warning alert pattern in the form of either a double top or double bottom. That’s the red flag that you want to watch out for to spot these potentially profitable patterns ahead of the crowd.
Sincerely,
David Grandey
AllAboutTrends.net
October 12, 2009
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