Monday, September 23, 2013

Tops, bottoms, uptrends, downtrends part 1

From time to time I try to include discussion to help you with your own analysis.  This is  one of those occasions.

You  hear/read discussions about different chart patterns and usually whether it is a topping or bottoming pattern. They may also discuss trend continuation patterns.  Can we simplify the whole subject without all the discussion that surrounds the different patterns?  I hope so.

Tops and bottoms generally occur when we get a symmetrical cycle top (probably a trend change to down is happening) or symmetrical cycle bottom (probably a trend change to up is happening).  Some symmetrical top patterns are a Head and shoulders,  a M, or a inverted V.  All of these are symmetrical cycle patterns indicating a probable top and trend change to down. That is pretty simple isn't it?

Some symmetrical bottom patterns are an Inverted head and shoulders,  a W or a V.  These are usually bottom patterns indicating a trend change from down to up. Again, that is  pretty simple isn't it?  The key factor in all these patterns is they are symmetrical!!! In summary we are looking for symmetrical cycle tops and bottoms to alert us to possible trend changes..

Are we topping?  Let's look at a chart and make a judgment from that:

The cycles are indeed becoming more symmetrical as the up legs and down legs become more equal.  So this alerts us to be extra careful and tighten up our stop losses and maybe even buy some insurance (puts or inverse ETFs).

OK, this doesn't prove the case because we do not know how the future plays out.  Let's look at a case that we do know what happened:

You can check and see what happened in 2010.  From this chart you also see once a  symmetrical bottom was set (a V shaped bottom) the market was onward and upward.

We will discuss uptrends/downtrends (flags, wedges, etc.) in part 2.

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