LOCKIT Complementing Trading Techniques

Trend reversal and trend continuation

Opening a position with a higher probability for making profit is possible if you trade after a trend reversal or after a trend continuation confirmation.

Trend reversal trading

First we will have a look at a trade after a trend reversal confirmation. Most important point of course is finding accurately a medium term price reversal point.

Figure 3.1: Abaxis daily, looking for medium term trend reversal; end of C wave reached?

August 7, 2007 price closes above the downtrend line. From the top in April, price has fallen back with an Elliot ABC zigzag correction. Wave A broke through the 50 and 100-days simple moving average (dashed line). Price reacted and formed wave B. There was some resistance from the 100-days moving average and price turned down bouncing against the resistance of the 50-days moving average.

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Are we now reaching the end of correction wave C?
Should we open a long position here?

Arguments for buying:

The double bottom with divergence in the SVAPO(8,1), the first indicator in figure 2.1, is an indication for a medium term reversal. We have a double bottom with divergence in the second indicator SVE_BB%b_HA(18) moving up now. Finally in the last indicator, the RSI(14) we are moving out of the oversold area.

The closing price crossed above the downtrend line.

We may have a completed ABC Elliott correction wave.

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Arguments against buying:

Strange is that the price move up of the last few days goes with a declining SVAPO. This would mean that the price up move is not confirmed with higher volume.

The 50 and 100-days moving average is near by and will present resistance very soon.

The risk/reward ratio is not good with a buying price now at $19.44 and support at the previous turning point at $17.54. This would be a stop at a rather high level of 11%.

After the correction wave we would be starting a new impulse wave 1. Impulse wave 1 is followed by correction wave 2, most of the time taking back a big part of wave 1.

Finally, we have no idea at all that wave C is completed and that we have reached the lowest point already. It is possible that we are still in the first correction wave (A) down, with an impulse wave 1 to 5. Then we would get wave 4 now and later on lower prices for wave 5.

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