Sharp Turn Ahead

SHARP TURN AHEAD

Changes in this volume pattern often warn of a reversal in trend before it actually happens. For example, if an uptrend has been proceeding normally, with higher volume on rallies and lower volume on reactions, and suddenly volume subsides on the rallies and increases on the reactions, it may be a signal of a pending price reversal.

To the chartist, each break of an established trendline is a caution signal. A single, simple break of a trendline in most cases may not indicate the end of the trend. But it’s a warning. And long experience in chart analysis has developed this rule of thumb: A trend reversal is quite likely to be in process whenever a stock price has broken through its well established trendline by as much as 3 percent, on increased volume.

VARIATIONS

An interesting variation from the straight-line trend is the curved trendline. In some cases, the momentum of an advance or a decline suddenly picks up steam so rapidly that an established straight trendline curves in the direction of the move. (The activity in XYZ Corporation, described earlier in this chapter, might well produce an accelerating curve.) Figure 8 shows upcurving and down-curving trendlines. If this curving occurs after an extended price move, it frequently results in a climactic action that brings the major movement to its final peak (or bottom in a sell-off). Climactic action is synonymous with frenzied buying or selling. Price moves are exceptionally wide and volume is abnormally high. This type of trendline can be drawn with a "French Curve” and can be just as valid as the straight-line variety. Warning: It is very difficult to pinpoint the end of a climactic move until the reaction phase has begun. The "blow-off” or the vertically rising stage can carry a considerable distance.

Study will reveal many other variations and complex formations of trendlines. Two interesting variations are the "internal trendline” and the "fan.”

Figure 9 shows how an internal trendline forms. The section from A to B is a normal uptrend line, while B to C, forming beneath the trendline, makes it an internal line.

A fan (as shown in Figure 10) develops when a well established trendline (A to B) is broken, but prices continue to move in the same direction and soon develop a second trendline (A to C); this second line is broken again, and a third trendline (A to D) forms—still in the same direction. When a third line breaks, a major turn in trend usually follows. Sometimes, to be sure, this procedure re-peats itself a fourth or even a fifth time—but the odds are overwhelming that a fourth break in a trendline will result in a turnaround.