Education & Information
Major Trends
Major Trend Change
Although stocks tend to trend to extreme highs and extreme lows, eventually the major trend will change and it will be time for an investor to take the appropriate action. Take the stock below for example. The stock makes a major advance from around $30 up to the mid $60’s. Demand is in control during this time and the major trend is up. There are two balance patterns during this major advance. The balancing pattern exists when supply meets the demand for an extended period and the chart takes a sideways movement without a general advance or decline.
Once a stock enters a balancing pattern one of two events will eventually happen. Either, the supply that is temporarily containing the demand is relatively short-lived and the demand reemerges as the major trend. If the supply gets washed out and the demand persists you will see the balance pattern broken by a higher column of Xs. On the chart below, you can see this example when the shares first get up to the $45 -$50 level. See how the stocks advance is contained temporarily at that time. However, demand eventually won that battle when the column of Xs was able to get above $50. This action indicates the stock is likely to make another strong advance as removing the supply near $50 is similar to taking the lid off of the price. See how the chart then goes into another strong advance while demand is taking over once again.
The other potential scenario is that all the demand that pushed the stock higher has been exhausted and the supply persists. As the demand fades it’s like pulling the floor out from beneath the stock and the supply will push it lower. You will then see a column of Os decline below the previous columns of Os in the balancing pattern. You will also see the Os penetrate the bullish support line and the main trend will then be down with supply controlling the action. The balance pattern is a battle between supply and demand. In this scenario supply would have won the battle and it would be time to sell.
You can see an example of this pattern near the top of the chart below. The chart enters a balance pattern between the mid $50’s and the mid $60’s. As supply and demand battle it out, also notice how the bullish support line eventually catches up to the price level where the stock is trading. Eventually, demand fades away and the supply is able to take over when a column of Os is able to drop below the previous column of Os and it is able to penetrate below the long standing bullish support line. Once this pattern is broken you can see how quickly the stock begins to decline. Once the demand is exhausted it is like taking the floor out from beneath the stock. The major trend has changed from demand in control to supply in control. An investor in this stock should use this formation as their discipline to sell. This is also a good time for aggressive investors to sell short.
You will see just the opposite action when the trend is changing from supply controlling the major trend to demand providing chartists major buy signals.
