How to Spot Trend Reversals with Great Accuracy


 
 
07:10 09/24/2018

When you pull a rubber band too far, what happens?

It snaps back. Stocks do the same.

At times, extreme bouts of fear can send a stock tumbling to excessive unsustainable lows. Other times, extreme bouts of greed can send a stock up too much, too soon. And if we can spot those very extremes, therein lies opportunity.

Once these opportunities appear, 80% success isn’t out of the question.

To find such hot opportunities, we only need two indicators, which have a history of 80% success when used together.

The first is Williams’ %R (W%R).

What’s interesting about W%R is that it historically turns higher or lower before said stock turns higher or lower. In short, it’s the ultimate momentum indicator that signals oversold and overbought conditions. As it nears or penetrates its 20-line, the stock in question is considered overbought. As it nears or penetrates its 80-line, the stock in question is considered oversold.

Then again, we can’t just buy a stock based on a single indicator.

So, we begin to confirm with Bollinger Bands (2,20).

With Bollinger Bands, stock prices tend to stay within the upper and lower bands. So, when prices move to or above the upper Bollinger Band, it’s considered overbought. When prices move to or below the lower Bollinger Band, it’s considered oversold.

Look at Caterpillar Inc. CAT  for example.



Notice what happens each time the stock challenges the upper or lower Band, as Williams’ %R moves to or above its 20-line or to or below its 80-line. The stock pivots.

With these indicators we’re simply spotting where fear and greed have forced big moves.


This article has been provided by a Chasing Markets contributor. All content submitted by this author represent their personal opinions, and should be considered as such for entertainment purpose only. All opinions expressed are those of the writer, and may not necessarily represent fact, opinions, or bias of Chasing Markets.
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