the hAnDbook of teChnICAL AnALySIS5.11 Forecasting Trend Reversals
The following is a summary of characteristics associated with forecasting reversals
via various forms of technical analysis. For detailed analysis of each approach, re-
fer to the relevant chapters within this handbook.a. Volume Divergence
Potential market reversals tend to be accompanied by:■ (^) Diminishing volume in an uptrend or downtrend (indicating potential weak-
ness in the trend)
■ (^) Extreme volume in the form of buying or selling climaxes (indicative of
market tops and bottoms)
b. Chart Patterns
Potential market reversals tend to be accompanied by:
■ (^) Bearish chart patterns occurring after a strong and prolonged uptrend
■ (^) Bullish chart patterns occurring after a strong and prolonged downtrend
■ (^) The appearance of a large broadening, diamond, or island formation
c. Cycle Analysis
Potential market reversals tend to be accompanied by:
■ (^) Cycle peaks at market tops
■ (^) Cycle troughs at market bottoms
■ (^) Decreasing cycle amplitude during a trend
■ (^) Decreasing cycle period during a trend
d. Oscillator Analysis
Potential market reversals tend to be accompanied by:
■ (^) Overbought signals at market tops
■ (^) Oversold signals at market bottoms
■ (^) Bearish divergence with price at market tops
■ (^) Bullish divergence with price at market bottoms
■ (^) Oscillator crossing below its signal and equilibrium line at market tops
■ (^) Oscillator crossing above its signal and equilibrium line at market bottoms
e. Candlestick Formations
Potential market reversals tend to be accompanied by:
■ (^) Bearish candlestick formations at market tops
■ (^) Bullish candlestick formations at market bottoms
f. Intermarket Relationship
Potential market reversals tend to be accompanied by:
■ (^) Bearish action in the broad markets leading to a top in the stock
■ (^) Bullish action in highly correlated markets leading to a bottom in the stock
g. Support and Resistance Levels
Potential market reversals tend to be accompanied by:
■ (^) Market tops at significant historical resistance levels
■ (^) Market bottoms at significant historical support levels