The Dow Industrials- Hourly Chart
I have simplified the reversal process into three easy steps. Now before I go in to explaining exactly how to identify a reversal, one must have the ability to recognize early warning clues that lead up to such an event. Some examples include- Stocks above their 50 day MA in overbought territory, Divergence in momentum and swing indicators, exhaustion in the current trend, and Topping price patterns. There are many others, but these set of examples should lead you in the right direction.
To simplify matters even more, I will use The Dow Industrials. In the chart above, I have drawn a rising wedge pattern to outline the containment of price. A break out of this particular pattern does not necessarily suggest the trend is broken, but do take heed to the lengthy duration of this current uptrend. Following the "Break" , the next step is a backtest of the same trendline. During the backtest phase, prices rally back up to the broken trendline where they now find resistance. This same level will produce a lower high and a fairly good entry point for a short postion. Finally, the resumption of the trend gives meaning to the newly defined downtrend. It clarifies the price structure by revealing a series of lower highs and lower lows.
The Russell- Daily Chart
The Russell produced its own reversal around the same time as the Dow Transportation Average. The trendline break in the daily time frame is confirming the reversal that transpired on the Hourly chart. The Basic idea is that price is conveying weakness that can be seen in a higher time frame. I should also mention that the higher time frame dictates the direction of the trend.
The U.S. Dollar- Weekly Chart
The Dollar is now showing strength on the weekly chart. This certainly will generate selling pressure in the equities markets.
The VIX- 4 Hour Chart
The VIX is now confirming several sell signals for the Market Averages.Folks, If it's not clear to you, then let me say it like this- WE NOW HAVE A REVERSAL IN ALL MARKETS!
Good Luck with your Trading,