Trend Reversal Watch

I am on a trend reversal watch in equities and major indices alike. I am specifically looking for the classic 1-2-3 setup or as mentioned last week, a Dow Theory confirmation of a trend change.

I am watching the major indices for a reversal pattern setup. For example, the NASDAQ and DOW have both violated their long term trends but they are yet to establish a definite “minor low” and then a failure to close above the previous high.

Let’s see if the NASDAQ and DOW will continue to form a chart similar to BLK.

Do not jump the guy and start shorting before the SIGNAL is given. Be patient, these patterns can take months to confirm.

We are looking for point #2 and point #3 to confirm before establishing a short (trend reversal position).

Point #1 has confirmed but that is not enough to place a short position, the risk is still high as the odds have not been confirmed in our favor. Without confirmation, the market could move higher which will lead to unnecessary losses.

Back to Victor Sperandeo’s book about the 1-2-3 setup:

At the point where all three of these events have occurred graphically, there exists the equivalent of a Dow Theory confirmation of a trend change. Either of the first two conditions alone is evidence of a probable change in trend. Two out of three increases the probability of a change in trend. And three out of three defines a change in trend.

Three out of three defines a change in trend : that is what I am looking for. At that point (if it happens) is when I will short and short heavily!

Lastly, keep in mind that this 1-2-3 pattern also works for reversal to the up-side: