Chart Advisor: ALLE Breaking into Uptrend

Articles From: Investopedia
Website: Investopedia

By Foram Chheda, CMT

1/ Trend Reversals

2/ Scouting for Trend Reversals in Overheated Markets

3/ ALLE Inverse Head & Shoulder Patterns

4/ Moving Averages and Pattern Analysis for Confirming Trend Reversals

Investopedia is partnering with CMT Association on this newsletter.  The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.

1/ Trend Reversals

Trend reversals in technical analysis denote a shift in the prevailing direction of a financial asset’s price movement. Identifying trend reversals is crucial for traders and investors aiming to make informed decisions. Typically signaled by technical indicators, chart patterns, or key support/resistance levels, these reversals indicate a change from an existing uptrend to a downtrend or vice versa. Recognizing the early signs of a reversal is essential for capitalizing on potential market shifts and adjusting trading strategies accordingly. 

2/ Scouting for Trend Reversals in Overheated Markets

Courtesy of StockCharts.com

The markets are in a firm grip of the bulls; SPX looks set to scale greater heights as it breaks out from a bullish ascending triangle spanning almost a year and a half. However, on the daily chart, the markets look quite overheated, especially after the Fed kept the rates unchanged and further hinted at rate cuts in 2024. On the daily charts, markets look overstretched as they head for the seventh consecutive week of gains. 

This is the time when one needs to manage risks, get out of the stocks that have steeply run ahead of the curve, and more importantly move to stocks that appear to be laying the ground for a fresh up move. 

In overheated and steeply overbought markets, identifying stocks that underperformed but exhibit signs of a trend reversal is essential for risk management and capitalizing on potential opportunities. When the overall market is saturated with overbought conditions, stocks that have lagged may present more favorable risk-reward profiles. Scouting for these underperformers with indications of a trend reversal allows investors to potentially enter positions at more favorable valuations, taking advantage of the correction or reversal in market sentiment. 

3/ Inverse Head & Shoulder Patterns

Courtesy of StockCharts.com

ALLE has broken out from a bullish Head and Shoulders pattern. 

The Inverse Head and Shoulders pattern is a bullish reversal pattern in technical analysis. It consists of three lows, with the middle trough (head) being lower than the surrounding two (shoulders). The pattern signals a potential trend reversal from a downtrend to an uptrend. Traders typically look for a breakout above the neckline, which connects the highs of the two shoulders, to confirm the reversal. This pattern is considered a bullish indicator as it suggests that the asset’s price may move higher after the completion of the pattern, providing traders with a potential buying opportunity. 

ALLE has not only broken out from this bullish reversal pattern, but it has also crossed and closed above the 200–DMA. From the technical price measurement implications, so long as ALLE keeps its head above 107 levels, it has the potential to test 115 and 118 levels over the coming days. 

4/ Moving Averages and Pattern Analysis for Confirming Trend Reversals 

Courtesy of StockCharts.com

Moving averages crossovers (eg., 50-period MA crossing above 100-period MA) and pattern analysis (e.g., Channel breakouts) are concise yet potent methods for detecting trend reversals. These tools enable traders to swiftly identify potential shifts in market direction by analyzing both short-term moving average dynamics and distinctive chart patterns. 

Precisely in this case, DIS stayed in a secular multi-month downtrend where the price kept moving lower and remained in a falling trajectory inside a falling channel inside which the price kept making lower peaks and lower troughs. A base was formed where the price made a minor double-bottom and inched higher eventually breaking out of the falling channel. 

DIS has also seen its 50-DMA crossing above 100-DMA indicating a return of momentum. The price now trades above all key moving averages. The current technical setup suggests that given the current structure, the stock is set to inch higher towards 95 and 98 levels over the coming days. 

Originally posted 15th December 2023

Join the Discussion

Thank you for engaging with IBKR Campus. If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.

Your email address will not be published. Required fields are marked *

Disclosure: Investopedia

Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.