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My rules for Reversal Watch Criteria

A couple of weeks ago I noticed the front page of the Economist publication, which had a front-page title – ‘The energy shock’ and it reminded me that market psychology plays a huge part as one of my reversal watch criteria. After all once a market starts moving a lot and grabbing more headlines, more and more people jump on that trend and once it gets to the front page of newspapers or publications, like The Economist, it is generally a good indication that a move is either at or very near the end of its move. I have for many years worked on the trading floor of several large banks and have always found this to be a good indication of market in general. A few years ago I had a strong view on the fixed income markets as I had noted that the US 10Y yield had reached my long term downside target. I duly went off to tell the traders that the market had got to its target and they might like to think about covering their long positions on Fixed Income futures and not only was NO-ONE interested in hearing my view they simply told me to get lost – they had made money all year being long fixed income futures. So, I went and sat back down and thought hang on if all these guys are already long, who is left to buy? Within a couple of days the market had turned lower very quickly with absolutely no new news or any fundamental reason that I could determine. This is something I have observed over the many years in the business. But it does kind of makes sense as well, for a market to go up aggressively it takes a lot of buying and if most people have already bought who is there left to buy? For a market to go down, it does not have to be a change in fundamentals, it can just be a lack of buying…. So, if one of my reversal watch criteria is market psychology what are the other criteria? 1. The market is approaching a significant target area 2. The market is over-stretched or runaway ahead of target 3. We have heightened intraday volatility 4. We have Newspaper articles 5. All dealers/articles/people you speak to have the same view We saw these conditions met recently on the Oil market. It is always extremely hard to cut a position that you are making money in and it helps when you have a list of criteria that you can watch. Once these criteria start to be met, it is a good idea to tighten up stops and think about lightening a position. Disclaimer: The information posted on Trading View is for informative purposes and is not intended to constitute advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. The information therefore has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Opinions expressed are our current opinions as of the date appearing on Trading View only. All illustrations, forecasts or hypothetical data are for illustrative purposes only. The Society of Technical Analysts Ltd does not make representation that the information provided is appropriate for use in all jurisdictions or by all Investors or other potential Investors. Parties are therefore responsible for compliance with applicable local laws and regulations. The Society of Technical Analysts will not be held liable for any loss or damage resulting directly or indirectly from the use of any information on this site.

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