In the stock market, identifying stocks during trend reversal before a big rally can prove beneficial for market participants. If you can identify such opportunities early, you can potentially make attractive profits. However, the question is how can you spot a trend reversal stock? In this blog, we’ve mentioned five effective steps to spot the stocks in trend reversal before the rally. Let’s begin!
5 Steps to Spot the Stocks in Trend Reversal Before the Rally
Here, we’ve mentioned five effective steps to identify the stocks in trend reversals before the rally.
1. Use Key Technical Indicators
Technical analysis is one of the primary ways to identify potential trend reversals. Multiple indicators can be used to identify when a stock is about to change direction.
- Moving Averages: When the short-term moving average crosses over the long-term moving average, it creates a golden cross, which is a sign of an upcoming rally.
- Relative Strength Index (RSI): Using RSI can help you determine when a stock is overbought or oversold, which could suggest a change in direction. The RSI’s score above 70 showcases overbought conditions, while below 30 showcases oversold conditions.
- Moving Average Convergence Divergence (MACD): This indicator can be used to determine a shift in momentum. When the MACD line crosses above the signal line, it is a potential sign of an uptrend.
Therefore, these indicators can help you identify trend reversal before a rally.
2. Look for Chart Patterns
There are several chart patterns that showcase the reliable signals of trend reversals. Below, we’ve mentioned some reliable patterns.
- Head and Shoulders: This is one of the classic reversal signals that appears at the end of an uptrend. This pattern has three peaks, including one middle peak (head) and two smaller peaks on each side (shoulders), creating a neckline drawn across the bottoms of two shoulders. When the price breaks below the neckline, it signals a trend reversal.
- Double Bottom: This pattern generally occurs when a stock hits a low, bounces back, and retraces to a similar low before rallying higher. Therefore, it is known as the “double bottom” pattern, representing a downtrend’s end and an uptrend’s beginning.
- Hammer: It is a bullish trading pattern that can help you understand when a stock has reached its bottom and positioned for trend reversals. You can also use screeners to find hammer pattern stocks.
3. Monitor the Volume
Volume analysis is one of the key indicators to assess trend reversals. When a stock experiences a significant increase in volume during a downtrend, it is in the early stage of building buying pressure.
In contrast, low volume during price moves showcases a weak conviction in the trend, making it a reliable signal.
Similarly, if reversal patterns like double bottoms or head and shoulders are accompanied by strong volume, the chances of a reverse signal increase.
4. Understand Market Sentiment
Market sentiment is one of the core drivers of the stock market, allowing you to spot potential trend reversals. As mentioned below, there are two main methods for understanding market sentiment.
- News and Events: Impactful news, earnings reports, or geopolitical developments can trigger market sentiment. For instance, a stock may be facing a downturn due to a poor earnings report, but a positive earnings report in the next quarter can trigger price reversals.
- Investor Sentiment Indicators: Several sentiment analysis tools and platforms can help you gain insights into how an investor feels about a particular stock or sector.
5. Monitor Support and Resistance Level
Support and resistance levels play a role in the psychological barriers traders face.
Support is the price level at which stocks generally tend to attract buying interest. Resistance indicates the price level at which selling pressure often emerges.
When the stock significantly breaks below a support level, it can be a potential signal that the downtrend will continue.
On the other hand, when a stock’s price breaks through resistance, it suggests the end of the downtrend and the beginning of a new uptrend.
Conclusion
In summary, these are the five effective steps to identify trend reversals. Using these steps can help you identify opportunities in the market before a stock experiences a significant rally. You can also use a free stock screener tool to spot trend reversals before the rally.
(Disclaimer: This is a guest blog)
