Quote:
Originally Posted by Unregistered
Hi! I have been eyeing a certain company. (I dont know if I can give that info here) It was in a long downtrend, formed a double bottom in April & has been going strong ever since. The 5, 10, 20, 50, and 100 EMA's are all lined up and still in convergence on every chart.
my questions are... I see double tops/bottoms create a HUGE incline and a HUGE decline. What is a good way of determining the momentum it will create? (power in the movement to remain in the direction)
And how can it be determined if a company is out of a downtrend? If it has been rising for a month, that would be a sustained rally right? It's just one sudden rise on a 6 month and yearly chart. I avoid the purchase because I feel that I might join at the wrong time, although all the EMA's are lining up & converging perfectly.
Francesca xxx
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Hi Francesca,
All the stuff that we talk about on the forum is for educational purposes so you can feel free to post the stock you are talking about if you would like.
I think many would agree with you that double bottoms and double tops are good reversal patterns. In general as far as a way to try and tell how much momentum a move will have after a pattern is formed many traders will look at the length of time and force with which the original pattern was formed.
So for example if you have a double top on the daily chart that was formed over a short period of time with lots of momentum then I think most traders would look for the reversal off the pattern to come with similar momentum.
Another thing that I think traders look at here is how significant the support/resistance levels are which are in the way of the reversal of the pattern. If there are many strong points of support below a double top or many strong instances of resistance above a double bottom, then I think most traders would agree that the market is more likely to stall around those levels than if there are not.
The only way that I am aware of to tell if a company is out of a downtrend is to first define the downtrend you are looking at. This could be done a variety of ways the most popular of which would be by drawing a trendline. Then once that trendline is broken then the instrument you are looking at has broken the downtrend.
There are two things to keep in mind here:
1. There can be multiple trends so most traders will look to define the long term, intermediate term, and short term trend. The longer the timeframe the trendline is drawn on generally the more significant it is seen to be.
2. When a trend is broken this does not neccessarily mean that a new trend has begun. For a new trend to have begun you have to define the new trend using trendlines or one of the other methods available.
For more information on this and how to draw trendlines see the below links:
Drawing Trendlines : Trader Mike
More on Trendlines : Trader Mike
Afraid to Trade.com Blog » Assessing the Validity of Trendlines
If there are any other questions or comments related to this please feel free to post them below.
Best Regards,
Dave