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  • Writer's pictureTrader Stewie

Minimize Risk Anticipating Reversals!

Hi folks!

I just wanted to make a quick educational post discussing the power of using current market trends, multiple time frames and market metrics to spot and anticipate low risk, high reward entries!

For the most part 2024 has traded a strong, sustainable, bullish trend higher. Taking advantage of short term market weakness and trading off the support of the trend has been the name of the game, while it hasn't necessarily been "easy" there have been many opportunities to spot and capitalize off of these short term pullbacks. Today I would like to give you a set of tools that I use in order to help anticipate and spot these low risk reversal entries.

On Tuesday the market opened and traded close to new all time highs. Keep in mind the market traded a strong and steady trend higher out of the low from April 19th. Making new all time highs in the process. As much as the price action and sentiment appeared to be bearish during that time, a market that trades back into new all time highs after a 5% - 7% short term pullback is not a bearish one. Spotting and taking advantage of these pullbacks can be a very lucrative endeavor. Planning, spotting and executing on the next opportunity is your job as a trader! Here are some tools you can utilize to do just that:

After trading near all time highs at the Tuesday open the market began to show signs of a potential short term spot of upper resistance. This started to become more prevalent on Wednesday with market breadth skewed largely to the downside. I made note of this but noticed quite a few stocks exhibiting good relative strength. I made Art of Trading members aware of my thoughts with this tweet here:

I like to use advance / decline statistics throughout the day to get a feel of where the market "really" stands. On Wednesday this sort of told us two things, overall the market was weaker than it appeared in comparison to price action but many of the leading stocks continued to hold up. Showing strength and participation under the hood. You can find the advance / decline ratio on on the home page. Add this to your analytical toolbox!

With Wednesdays market internals skewed largely to the downside it was no surprise to see extended weakness Thursday. I made an important observation Thursday evening with NYMO / NAMO. Basically NYMO / NAMO made a positive divergence close on Thursday and the last time that had happened was the climax sell off during the April 2024 pullback. I wanted to see the same condition the next day, Friday May 31st. A climax selloff that ended in a strong close. I tweeted this on the evening of May 30th:

NYMO Chart positive divergence Thursday close:

NAMO Chart positive divergence Thursday close:

Read more about NYMO/ NAMO here (Link)

Fridays strong intra-day selling pressure was the icing on the cake. Knowing we were seeing positive divergences in NYMO/ NAMO and relative strength charts even though market internals were posting weak stats, risk vs reward started to become too strong too ignore! Friday's intra-day selling pressure is ultimately what set the trade up!

Friday's strong selling pressure became quite extended to the downside and even more so when it traded into and even slightly below previous resistance (March 2024 - April 2024 highs). Analyzing multiple shorter term time frames that day exhibited a market that was due for at minimum a short term bounce. Strong intraday bounces in strong bullish markets are a common occurrence. The deeper and faster the market becomes oversold the better. Here's a good visualization of a daily timeframe chart from our 2024 trend that illustrates the power of the trend. Fridays selling pressure became extended as soon as we started to breach the March - April 2024 levels of resistance. Old resistance often becomes new support!

Notice how I've highlighted the range of the lower trendline with two parallel trendlines capturing the price range of the trendline itself? All too often I see traders draw very "strict" trendlines. Its important to give the trendline an acceptable range to trade within or you'll often get mixed signals as to when the trendline is broken, when in fact it is not. The 2024 bullish trend was only broken once so far this year in April.

On the 60 minute timeframe visualizing the depth of the selloff becomes more prevalent. The market offered some technical attributes that were very hard to ignore as the selloff became extended. RSI was deeply oversold and at noon hour on Friday the market put in a strong hammer reversal candle on the 60 minute timeframe. This is what that looked like:

On the 5 minute timeframe a very similar setup was prevalent, the market was quickly becoming extended to the downside offering at minimum a potential bounce into the close on Friday. I tweeted this. Note the $50.96 low shortly after noon hour!

We followed this development closely throughout the afternoon:

And into the close:

So as you can see, using trendlines on longer timeframes can transfer well into shorter timeframes, especially for strong low risk, high reward entries. In this case the daily timeframe was trading slightly below March 2024 support, the 60 minute timeframe had put in a strong low with a hammer candle reversal and the 5 minute timeframe was showing signs of exhaustion to the downside especially when volume poured in shortly afternoon hour and continued to hold through 1:30PM EST.

I have a previous step by step educational post Using Shorter Time Frames to Unlock Hidden Patterns that you can read through as an extension to this post here:

To sum up the tools used to anticipate the reversal we used:

  • A daily timeframe $QQQ chart with strong defined trendlines with previous support / resistance to gauge price action and strength of the market

  • A look at advance / decline ratio's intraday ( homepage) to get a feel for underlying weakness and potentially where the market wanted to go next

  • A scan of the market to visualize relative strength. More specifically how are the strongest stocks holding up on the weakest days?

  • A comparison on recent NYMO / NAMO behavior (April 2024 reversal) in relation to where it currently stood (Week of May 28th)

  • Multiple Timeframe analysis to unlock hidden patterns and spot low risk high reward entries

As you can see spending the time to analyze the current behavior of the market is a very important part of the process. A weak market isn't simply bought in the hopes that it just goes back "up". Taking the time to be methodical in your approach will allow you to enter the market in a confident manner. This is ultimately what goes into minimizing your risk during market reversals. Not only to you potentially get a strong, lucrative, short term entry you're also effectively tightening up your risk because the reward on the reversal higher far out weighs the potential short term move lower. A strong bullish market like the current environment we're in now is a big part of these conditions too.

Ultimately with where the market traded down into Friday your risk vs reward sat around 1:3 from the lows made at 12:30 PM EST. Buying the same idea on the closing price Friday would only realistically yield 1:1.5 or even just 1:1, not favorable for a swing trade. Where as traders trying to capture lows sit in a much better spot to carry the position.

I hope you can use some of the knowledge and teachings from this educational blog post to create your very own short term reversal entries and trades!

Cheers and happy trading!

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