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TREND REVERSAL SIGNALS BASED ON WEEKLY PRICES

So far we have seen five signals by applying various conditions (tests) primarily on DAILY PRICES or on daily charts. Now we are going to look at some weekly signals on WEEKLY PRICES. For these new signals, we will apply various conditions on weekly prices/charts. These are also very powerful trend reversal signals, and they help us predict price movement for the next three or more weeks. If you are not familiar with what weekly prices mean and how they are calculated, please read the previous chapter.

There is one very important thing to remember with respect to weekly signals. Unlike for daily signals, you don't have to wait for the final closing price of the current week when you are looking at a condition involving This Week Closing (TWC) price. A week can be a long time sometimes because sometimes trend reversals are V-shaped and very rapid. If we have a good signal in the making on Monday or on any day prior to Friday, we don't want to wait till the close of the market on Friday. We want to exploit an opportunity as quickly as possible. This is because if the trend reversal is powerful, waiting few more days just to get a confirmed This Week Close (TWC) price can result into missing out an opportunity of a big part of it. While applying conditions for a weekly signal, use the current price as the TWC price. As soon as all or most of the important conditions for a weekly signal are fulfilled with current price as the TWC, you can take a position. Then, after the week actually ends, you should see if the actual This Week Closing price also fulfills all conditions. If it does, we are good and hopefully our early action during the week might have already made some money for us. If it does not, we should be vigilant to get out of the position during the next week. As there is nothing like a free lunch in financial markets, let me tell you the missing part of the story. If you acted during the week and were correct in sensing the weekly reversal, you would have bigger profits than had you waited till close of the market to get the final actual TWC. However if the weekly signal you were sensing were a false one, you might have to close the trade in a loss. In this situation, if you were a patient trader, you would have avoided a loss. So as always, whenever you make any investment or a trading decision, you have to make some trade-offs.  

Let us know look at our first weekly reversal signal. As it is a simple signal based on weekly prices, we will call it WEEKLY REVERSAL signal. As we have been doing throuout this book, we will discuss this signal in two opposite scenerios.

First, we will look at WEEKLY REVERSAL (BUY) signal to see how this signal indicates a trend reversal in a stock that is in a downtrend. Then, we will see WEEKLY REVERSAL (SELL) to see how the same signal is applied in a stock that is going up.

SIGNAL- R6: WEEKLY-REVERSAL

WEEKLY-REVERSAL (BUY):

DESCRIPTION: WEEKLY REVERSAL (BUY) signal is like very much like the REVERSE (BUY) signal. One important difference here is that the REVERSE uses daily prices or a daily chart but for WEEKLY REVERSAL signal we use weekly prices or we look at a weekly chart. The other difference is that the REVERSE is normally a weak or a minor trend reversal signal but WEEKLY REVERSAL is a powerful trend reversal signal. Both these signals are also easy to identify when you are looking at a price chart.

Let us list conditions required for WEEKLY REVERSAL (BUY):

  1. The stock has to be in a continued downtrend. This means at least for the previous three or more weeks, the Weekly Low price has to be getting lower.
  2. Previous week has to be a Bear Week. This means Previous Week's Close price has to be LOWER than Previous Week's Open price.
    PWC < PWO
  3. This week has to be so far a BULL WEEK. This means, the current price or This Week's Close (TWC) price has to be HIGHER than This Week's Open price.
    TWC > TWO
  4. This Week's Low price (TWL) has to be LOWER than Previous Week's Low price (PWL) by at least around to 1%.
    TWL < PWL
    The more the difference between PWL and TWL, the more powerful the signal is going to be.
  5. This Week's Low price (TWL) so far has to be the lowest price for the stock for the last few weeks. If this is not true, the signal loses most of its power and should be used only to close existing positions but not to initiate fresh positions.
  6. If the current price which we take, at the moment, as 'This Week's Close price (TWC) is HIGHER than Previous Week's Close price, we can see this as a WEEKLY REVERSAL (BUY) signal in the making. If this week has actually ended, we could have a confirmed test of this condition.
    TWC > PWC
  7. Volume is not as important in weekly signals as it is in previously discussed daily signals mostly because it involves quite a few days. However if we see a significant pick up in volume since the stock made This Week's Low price, this will act as a powerful confirmation for our current signal.

Let us look at weekly prices for ANDW (Andrew industries)

Here is the Chart for a quick look.

31-Mar-03

5.69

5.97

5.23

5.79

1379780

24-Mar-03

6.11

6.11

5.68

5.69

951480

17-Mar-03

5.76

6.25

5.69

6.11

2001040

10-Mar-03

7.57

7.9

5.71

5.84

4259380

3-Mar-03

7.64

7.77

7.28

7.58

1421520

Look at ANDW's weekly prices above. For the last few weeks the stock was making lower low prices (Condition 1). Then for the week of Mar 31st, the stock kept going down and made a low price of 5.23. This was not only lower than Previous Week Low price of 5.68 (Condition 4) but it was the lowest low price for quite a few weeks (Condition 5). Also the previous week was a Bear week because the stock had closed lower at 5.69 than the week's open price of 6.11 (Condition 2)

After making a low price of 5.23, the stock price changed direction and it started trading higher. When it traded higher than 5.69 (Previous Week's Close price), it fulfilled Condition 6. Also this price was higher than current week's open (TWO) at 5.69. So there was a possibility that current week would be a Bull week (Condition 3). So when the stock started trading higher than 5.69, we should see a WEEKLY REVERSAL (BUY) signal take place. When the week ended, the stock actually closed at 5.79, which was higher than Previous Week's Close price. So almost all the conditions were nicely fulfilled for our signal WEEKLY REVERSAL (BUY) signal.

Key Points to remember: Current Trend- Down.Close- must be very strong. Week- Bull week. Volume- increase in volume is helpful. Low of this week should be the lowest.

StockFetcher Syntax: "Show stocks where Close gained more than .5 percent over the weekly close 1 week ago and close gained more than .5 percent over open and close gained more than 1% over close 1 day ago and weekly close gained more than .5 percent over weekly open and weekly Low 1 week ago is below weekly low 2 week ago and weekly close 1 week ago is below weekly open 1 week ago and weekly close 2 week ago is below weekly open 2 week ago and weekly low reached a new 7 week low and weekly low dropped more than 2 percent below low 1 week ago and volume is above 500000 and close above 2 and chart-display is weekly and close is 15% below 10 week high "

ACTION: When this signal takes place it indicates the end of the current downtrend. If you have any short positions, you should consider closing them. You can also buy the stock and initiate fresh long positions. Sometimes when this weekly reversal occurs only after a two/three weeks downtrend making This Week's Low price the lowest only for the last three weeks or so, it is not a strong signal. In this scenario, if you have short positions, you should close them but for fresh long positions, it might be more advantageous to wait for some additional confirmations.

Please take a look at the Trade-Off situation. As mentioned earlier, you do not need to wait for This Week's official Close (TWC) to take a position. Say a stock makes a new low price lower than the previous few weeks' low prices on Tuesday and then it starts going up. Then if on Wednesday it trades higher than last week's closing price as well as this week's open price, then you can close current short positions and/or take long positions as on Wednesday itself. When the reversal is sudden, then waiting till Friday may forfeit a big part of the opportunity. Having said that, if Friday's close turns out to be lower than Previous Week's Close price, you will need to abandon this position. So sometimes an early bird catches the worm and sometimes it is the early bird who gets killed first.

STOP-LOSS: When you initiate a position based on this signal, you should keep This Week's Low price (minus 1% or so) as the Stop-loss. As in other signals discussed here, a Stop-loss is a must for this signal too.

Now let us look at what happened in the ANDW stock after we had a WEEKLY REVERSAL (BUY) signal. When we look at the chart below, we will find that the Weekly Low price for the WEEKLY REVERSAL (BUY) signal was not broken at all. The stock started its upward journey, from that low price, to touch a high price of 14.00 over subsequent few weeks. (If you look carefully at the following chart, you will see quite a few successful weekly reversal signals with various degrees of strength on this Chart.)

WEEKLY REVERSAL (SELL):

In the preceding section, we saw how a WEEKLY REVERSAL (BUY) signal took place when a stock is in a downtrend. Now let us look at how this signal takes place during an up-tend and indicates a reversal from a bullish trend to a bearish trend. We will call this signal WEEKLY REVERSAL (SELL). Let us use the same stock: ANDW.

See below the weekly prices and also the Chart for around November 2002 for ANDW. As you will notice, the stock was making new high prices week after week.

2-Dec-02

11.33

12.51

10.54

10.91

1458400

25-Nov-02

10.72

11.35

10.21

11.25

878325

18-Nov-02

9.76

11.13

9.38

10.73

1220400

11-Nov-02

9.14

9.86

9

9.8

1008400

4-Nov-02

9.21

10.12

8.91

9.2

1122760

The stock had a weekly high and also a recent high price of 11.35$ during the week of 25-Nov-02. Then in the next week, the stock continued its upward journey and made a high of 12.51$. Then it started trading lower. When it went below the current week's open of 11.33$, it created a Bear Week so far. Then when it traded below Previous Week's Close price of 11.25$, we had a potential WEEKLY REVERSAL (SELL) signal.

This was the time to close long positions and start going short on ANDW. Also when the week ended, the stock closed at 10.91$ which was lower than Previous Week's Close of 11.25$. So this signal was confirmed.

 

Look at the Chart above to see what happened in ANDW stock since we had this signal. The stock changed its course from the prior up-trend to a downtrend and ultimately reached to around 6.00$. As we have already seen in our most recent discussion, this was the time when we had a reversal signal, prompting us to close our short positions and start taking long positions.

Let us now summarize the conditions for WEEKLY REVERSAL (SELL) signal during an up-market.

  1. The stock has to be in a continued up-trend. This means that for at least the previous three or more weeks, the weekly high price has to be getting higher.
    As seen above for ANDW, prior weekly highs were getting higher: 9.86, 11.13,11.35.
  2. Previous Week has to be a Bull Week. This means that Previous Week's Close price has to be HIGHER than Previous Week's Open price.
    PWC > PWO (11.25 > 10.72 for ANDW)
  3. This week up until now has to be a BEAR WEAK. This means that the current price or the TWC price has to be LOWER than This Week's Open price.
    TWC < TWO

    This signal starts taking shape when ANDW traded below 11.33. At the actual end of the week, it proved to be a Bear Week: (10.91 < 11.33)
  4. This Week's High price (TWH, 12.51 for ANDW) has to be HIGHER than Previous Week's High price (PWH, 11.35 for ANDW).
    TWH > PWH
    The more the difference between TWH and PWH, the more powerful the signal is going to be. For ANDW, this was a significantly large difference of 1.16$!
  5. This Week's High price (TWH) up till now has to be the highest price for the stock in the last few weeks. If this weren't true, the signal would lose most of its power and should be used only to close existing positions but not to initiate fresh positions. (12.51 for ANDW was in fact the highest price for many preceding weeks.)
  6. If the current price (which we take here as TWC, This Week's Close, for the moment) is LOWER than Previous Week's Close price, we can see this as WEEKLY REVERSAL (SELL) signal in the making. If this week had actually ended, we would have confirmed the test for this condition.
    TWC < PWC

Volume is not as important in weekly signals as it is in the previously discussed daily signals. However if volume is also heavy during the WEEKLY REVERSAL (SELL) signal week, we do give a boost to the signal. For the case of ANDW above, we do see a significant increase in volume during the reversal week.

ACTION: When this signal takes place it indicates the end of the current up-trend. So if you have any Long positions, you should consider closing them. You can also sell the stock and initiate fresh Short positions. Sometimes when this WEEKLY REVERSAL (SELL) occurs only after a prior two/three weeks up-trend making This Week's High price the highest only for the last three weeks or so, it is not a strong signal. In this scenario, if you have Long positions, you should close them but for fresh Short positions, it might be more advantageous to wait for some additional confirmations.

STOP-LOSS: This Week's High price plus a margin of safety (0.5% to 1%)

Key Points to remember: Current Trend- Strong Up-trend. Open- Doesn't matter. Close- must be strongly negative. Week- Bear week. Volume- increase in volume is helpful. High of this week should be the highest.

StockFetcher.com Syntax: "Show stocks where Close dropped more than 1 percent over the weekly close 1 week ago and weekly close dropped more than 1 percent over weekly open and weekly close 1 week ago is above weekly open 1 week ago and weekly close 2 week ago is above weekly open 2 week ago and weekly high 1 week ago is above weekly high 2 week ago and weekly high reached a new 5 week high and weekly high gained more than 1 percent above high 1 week ago and volume is above 500000 and close above 2 and chart-display is weekly "

(Note: If you get confused by some term(s) used on this page, you can look at that term by clicking on this link. Don't give up. Try to understand this signal because this can make you lots of money.)

   Click here to look at some Short-term trading signals.




Disclaimer: This trading system/signal, like any other system, may fail at times. Exercise caution when trading and decide suitability of any trade by taking into consideration market conditions, your financial situation, investment objectives and circumstances. Always keep a stop-loss when you are trading.

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