Stock Trading Sys Tells You The Truth About Trends

The transition from an up trend to a down trend doesn’t happen overnight.   It’s a process, not an event.   Tuck this concept into your stock trading system and once in awhile, when uncertainty strikes, reread it.

You can prove this principle.  Pull up a daily chart of the NASDAQ Composite.  Shrink your data so the price bars from 2006 through 2009 are visible and take a close look at the last quarter of 2007.  You will clearly see a top was building.

Through March 2008 price declined.  Yet if not looking past March 2008 it would have been possible to argue that price was consolidating and another move up could be developing.

May and June of 2008 was another topping process and the third area of lower highs since the top in late 2007.  It wasn't until late August 2008 that the final top-building process occurred followed by the long, severe, and swift decline into early 2009.

Price didn't turn on a dime after the sharp down move in late 2008.  It took four months of consolidating price action to form a bottom.  Finally, in March 2009 a new trend found momentum and climbed upward for thirteen months ending in April 2010.

After a long up trend the first sharp decline will always find traders willing to buy.  Conversely, after a protracted down trend the first snap up will find traders that will sell.

Here’s a trading tip -- after an uptrend don’t short the first decline, short the second high.

Conversely, after a long down trend, don’t buy the first move up, but buy the second.

Reversals take time and sometimes build at an excruciatingly slow pace.  The process can lull traders into a mental haze.  Keep your stock trading system data current with up to date trend lines.  Watch for price to give you clues with higher highs or lower lows.

Is this August 2010 market consolidating for another move up?
Or will the consolidation be like that in late August 2008 and usher in another severe decline?

If you can accurately answer those questions then there is money to be made by trading your convictions.