The Trend Is Your Friend Until The End When It Starts to Bend

This was something I pointed out to a member/friend in an email this weekend. I also warned that reversals are often full of volatility and are not always the clean "V" type or "U" type of reversal, especially after a rally such as the one we just saw.

I included a chart like this in the email to drive home my point, which was, the back of the uptrend if broken, now the market will likely flop around a bit like any creature with a broken back, it's the equivalent to the "Bend" part of the title of this post. So I want to show you a few charts of historical reversals, the depth of the reversal isn't important right now, just the reversal itself.

Here are the faces of a reversal

In this example, the back of the trend is broken at the red arrow, but there were 5 days of volatility before price really started moving lower.

This is a sudden shock type of reversal, the trend's back was broken at the red candle, likely there was a surprising key fundamental event that occurred, but this is not the norm.

This is more of a trend "bending", much of the volatility was in place before the back was broken.

This example is more like the downtrend reversals I'm use to expecting. The back of the trend was broken at the red arrow, followed by 3 noise/volatility candles, before it resumed down. At the green arrow there was a 2-day shakeout. Most bear market downtrends will see nearly as many up or noise days as they will see down days. This is why I've been trying to prepare you over the last week to identify what is important in a trend and what is just normal market noise.

Finally this trend is the best example of the title of this post, a pure trend bending. While it also appears to be on of the nastier downtrends we've seen in these examples, remember that our emotions live in the now, TODAY. In retrospect, we'd all call this bearish, but how would you feel about the bearishness during the periods in the white boxes? There is a week-plus long volatility zone that would have many questioning the trend, there's another 3-day rally that would have an emotional impact on short sellers, yet this is still a severe downtrend.

It's better to be prepared and understand what to expect from a downtrend so you can put each day of price action in to perspective.

Finally I want to end with this article from ZeroHedge. I agree with much of what is said in the article, except for this excerpt,

"The move the past two weeks was foreseen by no one and hurt a lot of shorts while making longs feel smart yet again."


Well that part isn't true, we foresaw this coming in early June and despite many days in which the market could have snapped lower any second, 3C was giving us a strong signal that we would rally. So I would say we foresaw this move, the rough target, the reason for the move, which included squeezing shorts and trapping longs.


Please though, take a look at the article. I have a feeling the next leg down will be one of the worst we have seen in the last 2+ years.