TRADING TECHNIQUES
Reversing Trendlines To Predict Price Action
Look Back Before You Leap
by Richard Bergner
Look to the past to predict the future: It's a new way to
predict commodity price action as you study a chart.
How can you find good trading opportunities?
Imagine, if you will, all the ways you've read or heard about how to do
so. But if you're aware of those opportunities, you can be sure that others
are as well, thus lessening your chances of profiting from them. If you
want a different way to identify good trading opportunities, why not examine
a market's behavior in reverse? That's right -- look to the past to mark
trends that have a good chance of materializing, as you step toward the
future.
REVERSE TRENDLINES
One method I like uses reverse trendlines to home in on potential trading
zones. But what are reverse trendlines? Everyone knows that by simply extending
trendlines from the past, you can estimate the future and be better prepared
to trade. But instead of using normal trendlines that connect support points
in an ascending move and supply points during a descent, reverse trendlines
are drawn along the highs when prices are rising and drawn along the lows
when prices are falling. These lines represent momentum, which is reflected
by the points of contention where supply and demand come together, and
where either supply or demand overcomes the other, thus turning prices
in the opposite direction.
When surveying a chart, I like to look at those reverse lines whose
trajectories tend to meet at one specific point (Figure 1). This means
I would use a line from a previous series of upward moves whose angle of
ascent would be less than that of the next reverse line, which I identify
as I shift to the right on the chart.
FIGURE 1: A BOTTOMING PHASE. By drawing reverse trendlines
on this March cotton chart, you can see that a bottom has been reached.
That next identified line would most likely be an upward sloping
line off of two successive highs occurring during the corrective phase
of the most recent uptrend. One example would be a line drawn on the B
wave of an ABC correction. Furthermore, during a bottoming phase, the minor
corrective rallies identify reverse trendlines (up) with each successive
rally occurring at a lower level along the way. The further you move down
and to the right of the chart, the more likely it is you should look for
reverse lines with steeper angles of ascent so that the two, three, or
more lines will all converge at one point. If you place this point of convergence
to the right of the current action on the chart, you can visualize this
as a new target for a rally.
...Continued in the July issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the July 2005 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
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