Market crashes are part of the natural cyclical movement of the economy. At some point, certain catalysts will trigger major panic selling causing the stock market to dip lower than normal. In hindsight, these crashes provided the best technical entries to profit big in the market. However, during an ongoing major downtrend, no one really knows how long and how low it can go down. At most, the best move an average trader or investor can do is to observe price action and check if the panic has subsided. But how would you know if the current market move is already gearing for a reversal? The answer lies in the charts!
Listen to the Market
There is a lot of noise in the stock trading scene. If you check social media groups and forums, you'll get bombarded by lots of arbitrary information that will harm your strategy. The only valid source of information is the stock market itself. It will tell you everything you need to know when it comes to entries, exits and risk. The punchline however, is that you have to sharpen your skill in interpreting the information that the market is showing you.
To help you read the market better, here are a few reversal pattern tips and tricks to spot that pot of gold at the end of the rainbow.
Market Entries Through Reversal Patterns
The stock market communicates to you through the price chart. This is why it is crucial to be aware of the patterns that it is forming so that you'll be equipped to act on the opportunity.
There are two notable reversal patterns that commonly form at the end of steep and prolonged downtrends. A basing formation and a V-shape formation.
(Take note that these patterns are long term reversal patterns and are not particularly useful for short term trading plays.)
The Basing Formation
The chart pattern above is the end of the 2008 global market crash as seen in the PSEI. This is a prime example of a basing formation that paved the way for a 10 year bull rally.
Basing formations are fairly easy to spot. When majority of institutions slowly start buying, the price action forms a brief sideways move which is referred to as a point of accumulation. This accumulation is regarded as a basing formation wherein the price swings back and forth between key supports and resistances. At this point, the market is telling you that the panic selling has stopped and that big investors are starting to buy. After which, the increasing volume of buyers completely overtakes the sellers and the market shifts to an uptrend.
The V-Shape Formation
The chart above shows the 2016 market slump of PSEI. This particular downtrend was halted by a V-Shape reversal that shifted the market to a brief 7 month rally.
V-Shape reversals do not form any bases. Instead, it forms a single reversal point that immediately shifts the trend to a short term rally. Since there are not enough buyers that accumulated at support, this reversal will be brief and is prone to sharp pullbacks. As such, you have to be ready to sell at key market resistance to be able to re-enter again at the bottom.
Turning a Pattern to Profit
When you spot an ongoing reversal formation, it is time to start looking for a favorable entry. At this point, patience and discipline is crucial. As a best practice, it is not advisable to enter during the consolidation phase. You want a buy signal that is validated by above average buying volume. As such, it is advisable to use a breakout entry when the market finally reverses.
In the chart above, the point of breakout is the price level in which investors start buying aggressively. A breakout is generally a tipping point in volume when buyers overcome a heavy resistance of sellers. This surge in demand causes the price to shift to an uptrend.
A valid reversal makes use of a buy on breakout entry. This allows you to validate demand and be on the buying side just when the volume shifts. After which, the market will shift to a momentum setup and cycle to a buying frenzy scenario.
We hope this post has helped you. To read more stock trade strategies and tips, check out the online learning module in this website. We are constantly updating content to better serve you. Happy investing!
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