Confidently Anticipating Reversals!

Hi folks!

We're back with another in depth step by step educational AoT trading guide! Today we're going to cover the anticipation of the reversal trade and what I look for when markets are primed for a bounce.

Spotting Early Divergences Looking Under the Hood of the Market

I've talked extensively about my go to indicator on the official Art of Trading blog in numerous posts over the years. $NYMO and $NAMO is what I like best for a reliable oversold indicator. Usually you get about 2 or 3 good "Extreme" readings per year and you must pay attention to these spots because often they produce absolutely explosive results.

NYMO and NAMO dipped into an extreme reading early into the March market correction but indices and most stocks hadn't quite reach an attractive oversold level. So I wasn't in a rush to pull the trigger.

Looking March 30th when the market really sold down with velocity I was obviously paying very close attention to NYMO and NAMO but this time and surprising to be they hadn't made a new low, in fact they were creating a very clean positive divergence higher. A positive divergence on NYMO and NAMO against the index is usually a condition that creates explosive short term results. So I was confident that the bottoming process was underway and putting the strongest momentum stocks on my watchlist for bounce and bottoming attempts was now highly warrented.

These condition are your first indicators to the anticipation of the reversal!

The Anticipation of the Reversal

With strong trending momentum stocks the first multiday pullback is usually quickly entered by those who feel they may have missed out on the first run and secondly by those who slowly scaled out of profits along the way who are looking for a new entry point to repeat the process again, this time with a shorter timeframe in mind.

This is where you begin the process of "anticipating the reversal". Knowing that volatility should be part of the trading plan you can attempt to scale into a position after a multi-day pullback, keeping in mind that the wider ranged momentum trend is still intact!

A perfect example of this strategy could be applied to a momentum stock like $AAOI as of recently.

$AAOI put in a Power Earnings Gap followed by a strong momentum run higher followed by a 30% pullback, then a 30% bounce then another 30% pullback followed by a near 80% bounce. 

The key point here is If the primary trend remains intact with these momentum plays, often the outsized 30% - 40% or further pullbacks are met with aggressive short term buying, propelling them higher, often into new highs. 

AoT has been using this same type of mindset and strategy with the Top Pick this year. Trimming positioning into strength and making sure to book profits into outsized strength. Positioning can tend to be volatile, as it tends to be with strong momentum stocks but many opportunities are to given to get in and out with clean exits and entries.

How the Anticipation Mindset has been Applied to the AoT Top Pick of the Week

$AXTI was a great example from the Top Pick last week and although the strategy doesn't scale into positioning, the strategy often trims out of positioning. This is how it went down.

"$AXTI sold down viciously out of Mondays open creating a small window for a reversal opportunity as risk started to stack against the trade. Tuesday $AXTI was about to hold in, above the low made on Monday keeping the trade on. Wednesday the stock gapped higher and rallied with strength. Taking into consideration the move it made off of Mondays low I used this opportunity to book this trade."

Here is some fantastic feedback on this trade from dedicated AoT Community Members

The AoT Top Pick strategy is now +18.60% after week 14, 2026.

The 2026 Top Pick data can be found at this link here: [link]

---

Find more reversal tools and reversal trading strategies here:

---

I hope this step by step educational guide helped to give you more confidence in anticipating key market reversals going forward!

We just celebrated our 17th year anniversary at the Art of Trading! This is an achievement we're extremely proud of and if you also would like to join us and become a fellow AoT community member, we are offering some special discounts on the multi-month(3, 6 and 12 months) subscriptions!

As always, if you have any questions, please feel free to reach out to me directly at Traderstewie@gmail.com

Cheers and happy trading!