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SIGNAL S1: TURN BACK

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TURN BACK (BUY): Apply this signal for BUY signals
TURN BACK (SELL): Apply this signal for SELL signals

TURN BACK (BUY):

TURN BACK signal is primarily used for trading in short-term trends that may last from two to ten days or more.
For this signal, we need to understand what Top and Bottom mean. A Top is the highest price a stock reaches between a short up- and a down- trend. It is like a peak when you are looking at stock prices of a few days. Similarly Bottom is the lowest price that stock made over the last few days. It is difficult to define exactly how many days worth of data one should be looking at to determine a TOP or a Bottom. Two days? Four days? Or ten days? There is no standard rule. It is easier to spot a Top/Bottom on a daily chart than to figure it out with reading daily prices. If you are reading prices, try to observe short-term trends in the prices- subsequent daily Low and High prices. The lowest Low price and the highest High price during a few days' price movement are Top and Bottom. The highest price during the short-term trend change from Up-trend to Downtrend would be a Top; and similarly the lowest price during a short-term trend change from Downtrend to Up-trend would be a Bottom.

Now when a TURN BACK signal takes place during a short term downtrend, it points to the possibility of a short term up-trend hence we will call this a TURN BACK (BUY). Similarly when TURN BACK takes place during a short term up-trend, it creates the possibility of a subsequent short term downtrend and hence we will call it TURN BACK (SELL).

To keep it simple, let us first look at conditions for the TURN BACK (BUY) signal:

  1. The stock is currently in a short term downtrend.
  2. Today's Low price has to be LOWER than Previous/Last Bottom (PB) price we had, and Today's High price has to be HIGHER than that Bottom price. (In short, today the stock has to have fallen through the last Bottom price).
    TDL < PB
    TDH > PB
  3. Today has to be a Bull Day.  Today's Close has to be HIGHER than Today's Open.
    TDC > TDO
  4. Today's Close has to be HIGHER than Previous Bottom price. This is also a very important required condition for this signal.
    TDC > PB
  5. Today has to be the first or the second day on which the price goes below the Previous (confirmed) Bottom.

TURN BACK (SELL)

Now let us look at the conditions for this signal in a reverse situation- the change from a short-term up-trend to a short-term downtrend. As you already know we call this signal TURN BACK (SELL) signal. SELL stands for Bearish implications.

  1. The stock is currently in a short-term up-trend.
  2. Today's Low price has to be LOWER than the Previous Top price, and Today's High price has to be HIGHER than that Previous Top (PT). (In short, today the stock has to have broken through  the last Top price).
    TDL < PT
    TDH > PT
  3. Today has to be a Bear Day.  Today's Close has to be LOWER than Today's Open.
    TDC < TDO
  4. Today's Close has to be LOWER than Previous Top price. This is also a very important required condition for this signal.
    TDC < PT
  5. Today has to be the first or the second day on which the price crosses the Previous Top (after a Bottom was confirmed subsequent to this Previous Top).

BRIEF EXPLANATION:  Remember we are talking about short-term trends. What does Previous Bottom day mean? It means that it was the day on which, most recently, Demand had increased over Supply pushing the prices higher. So Bottom was the price level at which sellers paused and/or more buyers jumped on. Now on the TRUN BACK (BUY) day, if all above conditions are fulfilled, it suggests that the Previous Bottom price's psychological value is still intact. At and around this Bottom price level, many traders and/or investors still like to buy this stock. Or may be sellers are not willing to sell this stock at this low price. Similarly for TURN BACK (SELL) signal, it suggests that Previous Top's psychological value is still more or less intact. Around this price level, buyers seem to be unwilling to buy at this high price and/or sellers may be turning more active. In other words, traders/investors may be unwilling to carry long positions but willing to enter into short positions at this high price level.

What does this signal mean? To me, this signal means that whatever happened the last time in the vicinity of Previous Top/Previous Bottom is likely to be repeated. We can again look forward to a short up-trend pushing prices close or around Previous Top when TURN BACK (BUY) takes place.  Similarly in the case of TURN BACK (SELL), we can look forward to a short-term downtrend. and prices tending towards Previous Bottom.

ACTION: If the TURN BACK (SELL) takes place, you should close your long positions and you may start short-term short positions with a target price of the Previous Bottom. Similarly in case of a successful TURN BACK (BUY) signal, you should close short positions and you may initiate new long positions with a target price of Previous Top.

STOP-LOSS: For TURN BACK (SELL) signal, Stop-loss should be kept at Today's High price, and for long positions in response to the TURN BACK (BUY) signal, Today's Low price should be used for Stop-loss.

PRICE OBJECTIVE: For the TURN BACK (SELL) signal, it is very likely that Today's High can be a new Top (which can only be confirmed after subsequent two/three days' price movement) and you can expect the stock price to touch the Previous Bottom price level within next few days.
Similarly for TURN BACK (BUY) signal, Today's Low price is likely to form a new Bottom price and now within the next few days, you can expect the stock price to rise and attempt to touch Previous Top's price level.

Let us take as an example VZ (Verizon, Inc.).

Daily prices of VZ:

Date

Open

High

Low

Close

Volume

5-Aug-03

35.85

35.85

34.96

35.05

7740800

6-Aug-03

35.46

36.44

35.32

36.05

8215700

7-Aug-03

35.97

36.06

35.26

35.35

6168500

8-Aug-03

34.76

35.76

34.51

35

6045100

11-Aug-03

35.24

35.5

34.92

35.2

4910200

12-Aug-03

35.57

36.1

35.23

36.08

7718300

13-Aug-03

36.4

36.4

35.4

35.62

5061100

14-Aug-03

36.1

36.1

35.5

35.75

6283400

15-Aug-03

35.75

35.85

35.26

35.82

3117000

18-Aug-03

36.61

36.61

35.75

35.85

4196600

19-Aug-03

36.23

36.23

35.41

35.78

5766000

20-Aug-03

35.65

35.8

35

35.8

4670000

21-Aug-03

36.05

36.55

35.81

36.05

6177700

22-Aug-03

36.1

36.25

35.05

35.22

7230000

25-Aug-03

35.02

35.26

34.59

34.8

5056700

26-Aug-03

34.78

35.2

34.26

35.01

6410300

27-Aug-03

34.75

35.4

34.75

35.07

4671800

28-Aug-03

35.2

35.66

34.92

35.6

6076700

29-Aug-03

35.4

35.41

34.98

35.32

4265000

2-Sep-03

35.06

35.7

34.96

35.55

7194300

3-Sep-03

35.8

36.26

35.65

36.25

7870800

4-Sep-03

36.25

36.94

36.2

36.65

7699000

5-Sep-03

36.8

37

36.2

36.3

7698600

8-Sep-03

36.4

36.44

35.63

35.79

7673400

9-Sep-03

35.43

35.56

35.1

35.15

6660400

 


Chart of Verizon (Aug-Sep 2003)

 

Look at the daily prices for VZ around Aug 2003. On Aug 6th, it formed a Top of 36.44 and entered into a short-term downtrend. Then on the 8th, it formed a Bottom of 34.51 and started going up. Now on Aug 18th, VZ crossed the Previous Top of 36.44 and traded as high as 36.61. As the Previous Top was crossed, we need to be vigilant to see if TURN BACK (SELL) takes place today!

As of the 18th, VZ was in an up-trend (Condition 1). The Previous Top (36.44) was crossed as VZ traded as high as 36.61 and as low as 35.75 (Condition 2). Now Today's Close of 35.85 was lower than Today's Open of 36.40 making today a Bear Day (Condition 3). Also after crossing Previous Top (36.44), VZ closed lower than the Previous Top (Condition 4). Also today was the first day since formation of Previous Top (36.44) and a subsequent Bottom of 34.51, that VZ had traded higher than the Previous Top price. So the last condition was also fulfilled. Thus with all conditions fulfilled we had a TURN BACK (SELL) signal telling us to close long positions and initiate new short positions with a Stop-loss of 36.51 and the target price of Previous Bottom, 34.51.

Now let us look at TURN BACK (BUY) signal. On August 26th, Verizon stock price reached a low of 34.51 (Previous Bottom) and fulfilled the requirement of the Aug 18th TURN BACK (SELL) signal. Now interestingly enough, as of August 26th, VZ was in a downtrend. fulfilling our Condition 1 for TURN BACK (BUY) signal. The Previous Bottom (34.51) was broken as VZ traded as low as 34.26 and then as high as 35.20 (Condition 2). Now Today's Close of 35.01 was higher than Today's Open of 34.78 making today a Bull Day (Condition 3). After breaking Previous Bottom of 34.51 and making a new low price of 34.26, as soon as VZ started trading higher than 34.51 (Previous Bottom), we can see TURN BACK (BUY) signal taking shape (Condition 4). Also today was the first day since forming the last Bottom of 34.51 and a subsequent Top of 36.61 that VZ had broken through that last Bottom price. So the last condition was also fulfilled. Thus with all conditions fulfilled we had a TURN BACK (BUY) signal telling us that we can now close long positions and initiate new short positions with the Previous Top of 36.61 as a target.

As you can see from the prices of subsequent days, VZ made a new Bottom of 34.26 and started making new high prices over the next four to five days and on Sept. 4th, it crossed Previous Top (36.61) making our signal on Aug 26th a successful signal. Now on September 4th, the stock closed higher than Previous Top (36.61) but on the next day (variation of Condition 5), the stock closed below 36.61 and it was also a Bear Day. Thus once again we had TURN BACK (SELL) signal pointing to a short-term downtrend. with Stop-loss at 37.00 and a price target of 34.21. The daily prices of VZ for subsequent days are not shown here but the stock did not trigger our Stop-loss of 37.00, but did break the last bottom of 34.26 and touched a low of 32.80 on September 23rd.

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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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