One of the most famous sayings on Wall Street is The trend is your friend. As long as a stock moves in a clear direction, it pays to follow it. But no trend lasts forever. One day the party ends, and then we experience a trend reversal.
"Nothing stands still. Everything changes."
— Florence Scovel Shinn
A trend reversal is exactly what it sounds like: The stock breaks out of its usual pattern and permanently changes direction from up to down, or from down to up.
How to spot a reversal?
Volume is the key: A true trend reversal almost always happens with high volume. If the stock falls through its support line, and the trading volume is much higher than normal, it means the large, professional players are dumping their shares. Then it is time to get out!
Important signs
- The stock is no longer able to make new price peaks, but starts making lower highs and lower lows.
- The stock price crosses down through important moving averages.
- The company releases news that fundamentally changes their future prospects.