Identify Neutrality for Trend Reversals

Markets tend to shift to neutral at the end of trends. Furthermore, there are often subtle changes in momentum before reversing direction. Good traders have a knack for identifying the start of a trend or the end of one. There are a few patterns that are common at the end of a move.

Subtle Changes Reveal a Shift in Bias

During a bullish trend it is common to see the low of the day within the first hour of the session. And in a bear market the daily high is often made in the first 60 minutes. When opposite activity occurs, it signals a subtle shift in bias. When a trend higher swings to neutral, daily highs tend to be made early in the session. The opposite occurs near the end of a down trend, where daily lows are made early in the session.

Intraday Signs of Impartiality

Another indication a trend is near fruition includes a series of 3 to 5 sessions where both the high and low of the day are made after the first 60 minutes of trading. This sign of impartiality is often accompanied with decreasing volume and day range length. Markets were created to facilitate trade. So, if volume and ranges dissipate as a market moves in a direction it will typically turn and go the other way.

There are a couple of common candlestick patterns that show up when a trend is weakening. A small body candle (a.k.a. doji) signifies balance. These candles have similar opens and closes and a series of them over 3 days to a week is common before a market turns.

Momentum Candles

Markets move higher to attract sellers and lower to entice buyers. Another candle, called a hammer, shows up frequently just before a reversal in trend. A bull hammer typically has a long wick near the bottom of a range with a short candle body near the high. A bear hammer has a long candle wick starting from the top of range and a small candle body near the low. Hammers appear at the end of trends and are frequent at the onset of a new trend.

Another hint that a trend has played out is range length. Most charting services have an option called ATR or average true range. Use a short-term measurement between 10 and 15 days as a benchmark. When range length dips below average over 3 to 5 consecutive sessions a change in trend often follows.

Sector Correlations and Change

Sometimes subtle changes make a big difference. Make it a point to track correlations between treasuries (interest rates), equity indexes, foreign exchange, precious metals and energy. A subtle change in metals often has an impact on the dollar, which may be connected to interest rates that could affect equity market prices and even energy levels.

Interpret Intraday Signals to Enhance Timing for Entry and Exit

The combination of consecutive sessions with severe price overlap, decreasing volume, small candle bodies and below average ranges indicates trend exhaustion. When these factors occur, it is a warning to take profits, hedge your bet to endure a consolidation phase or countertrade a trend.  

John Seguin, Market Taker Mentoring

Trader Education