How do you maximize your chances of determining if the beginning of an uptrend will be sustained?

SCAlchemist

HOW DO YOU MAXIMIZE YOUR CHANCES OF PREDICTING THAT THE START OF AN UPTREND WILL TURN INTO A MEDIUM AND THEN A LONG UPTREND and not just be a short lived and fading uptrend?

markd

I'm not sure TA really gives you a long term forecast. It's supposed to show you what the big money is doing, but like everybody else, big money can be wrong. Nevertheless, a sound set up should give you an edge. I think the key is including volume in your analysis.

So here's a long term example on a monthly chart. But you can see similar set ups on daily and weekly charts.



This is kind of a simplified Wyckoffian approach. Similar principles anyway.

1 Climax downside volume - the largest volume(s) in a long time and very wide range bar(s)

2 Continuing decline but on lower volume; sometimes you go right into a range instead. When you get larger volume bars, they have long tails. At first they close lower but in the upper half of the range, and then you get one that actually closes up (March). That's when to pay attention. If it can close up on large volume in a downtrend, buyers are getting the upper hand.

(Note: this seems to be a general rule of trends - higher volume bars must make new trend closes or the trend is vulnerable. The trend won't break unless the counter trend takes advantage, but it's a warning to lighten up if you are long in an up trend, or get ready to enter long after buyer strength appears a down trend).

3 Volume indicators should be showing divergence with price. This one is Force(12)

4 Next, price should close above the down bar highs and you should get a strong up bar on higher volume, either on the breakout or shortly after

5 When sellers show up in strength (November), buyers respond immediately (December). This shows the stock has sponsors who are not ready to let the price collapse.

6 This is different expression of buyer tenacity - sellers try to cap the buyers for three bars (June, July, August), but fail to actually force prices lower. This is actually a critical area because the sellers are absorbing so much buying they could prevail.

7 Prices suddenly rising on low volume (September) shows the buyers did in fact prevail and the light selloff in October confirms that.

Also note the rising RS lines (red and blue) at the top of the chart as price moves sideways after the up leg (between 5 and 7).

This turns out to be a strong base. The aggressive entry is March 2009, the conservative entry is November 2010, although there is some rough weather ahead before the big payoff. Look at the rest of the chart for 2012 forward.

This pattern - down side exhaustion, a rally and then a pause to range along from the top of that first up leg before taking off - is pretty common. But, as I said, they don't all work out.

Check out the Wyckoff blog for more detail on this kind of approach.

stockcharts.com/articles/wyckoff/

SCAlchemist

Thanks for sharing your wisdom markd. It is VERY MUCH APPRECIATED !

brucefleet

I would add to Mark's comments....I look for conformational indicators (trending in the direction of the proposed trend with NO divergence) i.e. MACD, On balance volume, RSI over 50 for five days, etc. But no matter how many confirming factors you have, ALWAYS use stops because we are frequently wrong, which is to be expected. "let your profits run, cut your losses short"!