As a trader, it’s really important that you know how to read when a trend is likely to end. Because first of all, it helps you improve your exits. Secondly, if you can identify when a trend is going to end, you can use it as an opportunity to enter in the opposite direction.
Trading is all about timing – being in the right place at the right time. So how can you tell when a trend is coming to an end? In this article, we present five signs the trend is ending — two fundamental signals and three chart-specific technical signals.
2 Fundamental Signals that the Trend is Ending
The market is no longer reacting to news events the way it used to
Lately, the market has not been as jittery as it used to be when news events are announced. This lull in volatility leaves some traders wondering what is causing this delayed or muted reaction. Perhaps one explanation is that the market is becoming increasingly discerning when it responds to certain events and news items — only those deemed to have a long-term and meaningful impact are given due consideration. As such, instead of knee-jerk reactions to breaking news headlines, we’re seeing more thoughtful responses coming out of the market as participants take a more considered approach to assessing the true significance of any news announcement.
Prices are consolidating around key levels, rather than breaking out
If prices for various instruments have been hovering around set levels, rather than breaking out to attain new highs or lows, this consolidation of prices reflects a period of market stability and could potentially foreshadow periods of increased activity in the near future — and a potential reversal of a trend. One sure-fire sign the trend is ending is when the momentum weakens — prices have been unable to break out of their range and trading volume has been decreasing. Usually, this signals a period of low volatility as market participants are trying to assess the fundamentals for a new direction in prices.
3 Technical Signals that the Trend is Ending
Moving Average Tunnel Cross
One technical indicator that a trend may be ending is a moving average tunnel cross where we are using two moving averages — both are the EMA40 and one represents the high (blue) and one represents the low (red). They will never cross, but if the price action struggles to break through and finally does in a large move, we may be looking at a trend reversal.
See the below example, where the downtrend is struggling to move in any meaningful way past the top EMA40 high, and finally does, indicating that the downtrend is done.
Bollinger Band Spike Pattern
The Bollinger Band spike is a good setup indicator that a trend might be reversing. Below, we have the AUDUSD on the daily timeframe. First, you want to make sure that the price is in a mature trend.
So below you’ll see multiple trend waves. It has been trending higher for a while and then you look for a signal that the market is breaking out of the Bollinger Band and immediately retracing back into the Bollinger Band. This is a Bollinger band spike. It’s very important that you don’t have a close outside of the Bollinger Band, but you really want to make sure the price is immediately falling back into the bands. As you can see, these spikes were a good indicator that the uptrend reversed into a downtrend.
Next, we’ll look at a divergence in the price action and the MACD. And an indicator divergence basically means that, in the below example, the price action you see at the top and the indicator that you see at the bottom are diverging. They’re doing two separate things. So, in the example below, the price action is going lower whereas the MACD indicator is going higher. While the price is making lower lows, the indicator is moving higher.
The MACD indicator looks a little bit deeper, analyzing different price points, wavelengths, and trend strength. Momentum in the indicator indicates that the price might be moving lower, but the momentum, the underlying strength behind this downtrend, is losing momentum and weakening.
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