New Techniques  |  OCT 1997

Correction or Reversal? by Alex Saitta

Markets trend. And within those trends are corrective phases, which in turn are followed by the trend resuming. At some point, the major market trend reverses. So what might be a clue to whether the current price action is a correction or a trend reversal? Here’s one method to consider. After a market advance and the price drops below its moving average, technicians are faced with a question: Is the decline just a correction, or is it the beginning of a trend reversal? If, after the moving average cross, the technician decides it is indeed a correction (Figure 1), he’ll prepare to buy support, anticipating a resumption of the trend. If, on the other hand, he decides it is the start of a reversal (Figure 2), he will short the market when it crosses the average, anticipating even lower prices. After an advance and the market crosses below the moving average, how can you determine if a trend correction or a trend reversal is occurring? If the advance were a strong one, we should assume that the cross of the moving average signals the start of a correction, or at least a temporary pause in the uptrend. If the advance were weak, we would assume that the moving average cross signals the trend had ended and a reversal was under way.

by Alex Saitta