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Trading against the trend can be a dangerous move. As the saying goes, “The trend is your friend.” However, good profits can result from identifying the end of major moves. Hence, “The trend is your friend… until the end.”
Accurately predicting the end of a move largely depends on properly gauging trend and momentum strength. The ProfitSource Daily Trend Filter (DTF) is an excellent tool in this regard. Using swing chart rules, the DTF labels up-trends green, down-trends red and uncertain trends black. If prices rise on a stock while the trend is uncertain or down, do you conclude that this stock is trending strongly upwards? You shouldn’t.
This divergence between price direction and swing chart direction tells us that price action is not moving decisively enough to be called a trend. The following example on Alliant Energy Corporation (LNT:NYSE) illustrates the point. The Wave 5 leg down as the stock made a lower low gives us an uncertain reading.
Chart 1 – Alliant Trend Divergence
click chart for more detail
Divergence on the RSI and Oscillator (prices falling lower while the indicator does not) further supports the fact that the current down trend is slowing. In ProfitSource, it’s also important to note that both the TAPP and Range Projector targets were reached. This information tells us that a reversal may be on the cards.
Following the price movement on LNT, there are a number of potential entry points. Patience is often rewarded in trading, and this is a prime example. Rather than jumping in at the first sign of a breakout, wait for a test of support and/or consolidation. As shown in Chart 2, a safe entry opportunity emerged in mid-September after a break to the upside.
Chart 2 – Alliant Support Test
click chart for more detail
The trend reversal on LNT is confirmed when the Wave 4 high of the downward pattern is broken. Further confirmation comes when the new Wave 3 is labeled upward (as indicated on the right hand side of the chart).
Trend divergence, like many of the best set-ups, can be hard to find. One of the best places to look is a Wave 5 move in which the TAPP and Range Projector have been hit. As with this example, look for indicator divergence as further confirmation that the trend is slowing.
Combining momentum indicators with chart patterns (like Elliott Wave) and swing charts can point to potential price reversals that offer solid profit opportunities. With set-ups like this you might even say, “The trend is your friend, even at the end!”
Happy Trading
Jordan Craw.
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