Eventually all trends change. If you are short at a market low you need to know when to cover and get out. Likewise if you are long at a market high, here too you need to know when to get out. That’s where “change in trend” chart patterns come into play; these predictable chart patterns give investors warning signs that a stock’s share price could be in for a reversal.

At in the world of technical analysis, there are essentially three basic chart patterns we look for when it comes to change in trends. Considering the fact that we are at one-year highs we’ll focus upon change in trends from up to down. Those three chart patterns are: Double Tops, Trendline breaks and First Thrusts Down. Below are examples of each…

Trending Chart Pattern #1: Double Tops

A Double Top is exactly what it sounds like: two short-term tops in a stock’s price. There are variations to this pattern though — one such variation is the shake out high, where an issue breaks above the prior high by a smidge and then rolls back over. The other variation is that of a continuation high, which is where a stock is further along in a correction then goes through a rally period much like a snap back rally then proceeds to put in a double top and reverses back to the downside.

Below is a recent example of a continuation double top that I shorted earlier in the year:

Trending Chart Pattern #2: Trend Line Breaks

This too is rather self-explanatory in the sense that it’s simply all about a trendine break. That is, a retracement down that breaks below a stock’s trend line support level. Just remember bigger is better with this pattern — the bigger the pattern in time duration and scope the better. Just take a look at Trina Solar (NYSE: TSL) from January:

Trending Chart Pattern #3: First Thrusts Down

A first thrust down happens when a stock is in a clearly defined uptrend, then all of a sudden falls to either a prior support level or the 50-day moving average. That’s exactly what happened in the case below (the blue box is the first thrust down), then it proceeds to make a rally attempt — we call that rally attempt a snapback rally, by the way. Upon a break of the pink line it’s what I like to call “bombs away”.

That trendline break is your short-sell trade trigger.

In a larger sense, do you see what NewMarket Corp (NYSE: NEU) is doing? From the January highs through the February lows you could say that is a monster first thrust down, and everything above the pink line off the February lows is a big snapback rally.

Keep an eye out for any of these three patterns in the immediate future — they’re a signal that it’s time to take a step back from the long-side of the market.

Sincerely,
David Grandey, AllAboutTrends.net
for Penny Sleuth

March 24, 2010

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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