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🚀 Stocks Just Triggered a MAJOR Buy Signal
The downtrend in stocks has been broken. We are at a turning point.
Today we saw interesting price action that makes for a great learning opportunity.
If you caught my morning newsletter, I noted that a potential breakdown in the selling was in the works.
Re-sharing the chart here for your reference (4-hour chart):
Today, we saw the first of two potential breaks in the trend. This sends a signal to bears to “flip sides”, as bulls may be back in control. Notice how price broke above the first red line (4-hour chart):
Drilling down further, to the 1-hour chart, we can see quite clearly price has broken the first down trendline.
Not to mention stocks have formed a classic W-shaped bottom (4-hour chart), another major signal for traders to “buy”…
…while remaining extremely oversold on the weekly chart. ANOTHER signal for traders to buy.
Understanding the Confluence of Signals
Before I drill down on how to trade trendlines, I want to touch on an important topic. Remember, my goal is to find learning opportunities in real-time price action. Here is another opportunity to learn, something happening right now: the concept of confluence:
Confluence is defined as:
An act or process of merging.
As you can see from the price action, we have multiple buy signals merging together:
Reversal hammer candlesticks,
A break in the down trendline,
W-Shaped reversal pattern, while…
All happening at lower Bollinger on the weekly.
Taking trades where there is confluence from multiple — but not to many — signals, turns a regular trade into a high-probability trade.
What happens when trendlines break?
Trendlines are future price points where traders take note. In the most recent downtrend, you can see every time price hits the red lines, it plummeted.
A break in the down trendline is one of the first signals that tell us bulls have wrestled control away from the bears. In an uptrend, a trendline break signals bears are now in control.
Given that a break in the trendline sends a signal to flip sides, there is typically a “breakout” where price moves dramatically against the old trend.
How to Trade a Trendline Break
Now that price has rallied off the lows…
Aggressive traders will purchase on the breakout.
Conservative traders will wait for a breakout and then buy on the pullback.
Short traders remain sellers at the downtrend line, unless it closes on the opposite side (i.e. like it did today).
Obviously, to take advantage of a trend line break as a bull, you have to buy something. Where you buy at depends on how aggressive or conservative you are.
Bull traders will purchase stocks they like, ETFs, and/or regular call options.
My objectives is NOT to tell you what to buy (though sometimes I will suggest stocks I own); but rather, to help you learn when to buy.
Where is future price resistance?
Commit this rule to memory: Prior support becomes future resistance, and vice versa. Once price crosses to the other side, support becomes resistance, or resistance becomes support.
This is a concept called price polarity. So to find out future resistance levels, look at recent highs/lows on the above chart (horizontal blue lines).
Final Thoughts: Bulls and Bears Face Off
We are at a major inflection point in stocks. I believe the bias is to the upside.
In my opinion, the next two trading days are the most important of the year. Why? Because if we see this rally continue, the candlesticks on the weekly and monthly chart will trigger bullish signals, meaning buyers and investors will step in. If we don’t see a rally, the monthly and weekly candlesticks will remain neutral or bearish, and price will falter without more buying power.
Remember, the greater the timeframe of the candle chart you’re looking at, the more reliable the signal.
Given we have a trendline break, I think the bias is to the upside.
Happy Trading 😊