Trend Reversal Patterns Stock Volume Analysis: This video (and article) will show you how to catch major trend reversal patterns using stock volume analysis.
It works on the stock market, futures, and other commodities. This post will also teach you the overall fundamental understanding of trends and how to effectively use them in timing your trades to boost your trading performance.
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Trend Reversal Patterns Stock Volume Analysis
Welcome to this tutorial on trend reversal patterns using stock volume analysis, you can also use this with futures and commodities and other markets. So, this is actually a followup to the previous week’s video. That one is on volume trading strategy. I’ll put a link down in the description for that one, but I’ll do a quick review here real quick just to show the meta-pattern that we demonstrated in that video, which is really easy. Basically, we get an impulse-move up and a retrace, and what we want to see are these little rectangles on volume where volume, in fact, we are going to do it all the way across, and we want to see as the market moves up a breakout of that rectangle outside of that range and that indicates a strong move up. Now on the retrace, that’s just as important.
In fact, a little bit more important even and we want to see that volume dip back down into that range. In other words, we don’t want to see big volume on the retrace, otherwise, then this uptrend may be at an end because there’ll be strong selling and then as the market moves back up – that is what we’re looking for at that trend. Then we get volume coming in. So it’s a strong move up and it goes to that bar there. And then on the retrace, buying comes back in the zone. Again, we have strong buying, weak selling, all right? And that’s the basic meta-pattern that we teach for trend continuations and then it just gets stuck in this range and goes nowhere. It just kind of gets range bound then, right? That’s the first meta-pattern to understand for trend continuations. Let’s look at trend reversals.
Reversal patterns technical analysis
Now, this could be a trend change because the strength is to the downside and is indicated by volume. So now, we get an up move. Well, is that up move on strength or weakness? Now it’s on weakness. It only goes up on basically two bars there and it’s going up and weakness. So again, then when it comes back down, it comes down on strength, strong volume if you will. So you see the dominant energy. If you think about it with that phrase, what is the dominant energy of the market? Is it moving up with strength, moving down with strength or is there just no dominant direction at all? I mean during this time here, frankly, there’s really no dominant energy up or down. Even though the price of the market is moving up, but there’s no dominant energy in the market with regard to volume.
So let’s see. Let’s draw in our average zone here for volume trading, it’s right in about there. Again, if you want, you can use a moving average there. I prefer to do it this way personally. Now, as the market goes up, do we really get, you know, here we do, yes, and it goes up from there. But after that point, where’s the next time that volume gets above the top of the range? Does it go up? No, it’s going up on weakness. See that going up on weakness. In fact, I don’t even want to draw that, let me do it this way, so here. Let’s highlight that in yellow because we use yellow for keeping within the zone, so sure. This whole time the market is still going up on price, but not on strength, it’s going up on weakness. That is our first clue.
Trend reversal indicators
That’s our first indication that this value may now be coming to an end. Then when it comes down, if we were going to continue to buy this as a trend continuation pattern, we’d want to see weakness on the way down in terms of volume, but no, we get strength. We’ve got big volume bars, so it’s coming down on strength now. That means there is not just profit taking and not just retail or shorting, but there are large institutions selling big volume on the downside. That’s actual shorting not just covering positions, most likely. Either way, it is not good for the bulls.
Now, this could be a trend change because the strength is to the downside, indicated by volume. Now, we get an up move. Well, is that up move on strength or weakness? Now it’s on weakness. It only goes up on basically two bars there and it’s going up in weakness. So again, then when it comes back down, it comes down on strength, strong volume if you will. So you see the dominant energy. If you think about it with that phrase, what is the dominant energy of the market? Is it moving up with strength, moving down with strength or is there just no dominant direction at all? I mean during this time here, frankly, there’s really no dominant energy up or down. Even though the price of the market is moving up, but there’s no dominant energy in the market with regard to volume.
Bearish reversal patterns
And again, we can look at one more example, it goes up. When it goes up, it goes up on what weakness going as back down within the range and when it comes back down, it comes down with strength. So that’s it. So now, as soon as we get to this, now the first time this happens, that actually this is your first clue, right? Right in here. That’s your first clue. And then this is more like the confirmation. So it’d be hard to buy or hard to short this because this comes in at the end of the move.
So then you’d look at maybe a retrace and then you’d say, okay, well if I needed to be real aggressive and short up here based on this pattern, and again, I wouldn’t do that unless it was an extended trend, but that’s a pretty aggressive trade, I’d have to say pretty aggressive because you don’t really have any confirmation of strength to the upside or downside. But for real aggressive traders, that’s a potential option. The better one, I think we have more confirmation now. Now, we have seen the dominant energy of the market shift to the downside. And so this retrace really, the first time that you know the best, most conservative, the trade entry for a trend reversal trade.
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