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Catching An Early Bullish Trend

03/14/11 08:57:05 AM
by Billy Williams

Nothing is more prized than catching the beginning of an emerging bullish trend, but you have to know what to look for and have a game plan to succeed.

Security:   JJG
Position:   Hold

In trading, there is no prize like capturing a new bull trend just as it is beginning. The profit potential alone can make up for a long series of losing trades if you understand some key concepts concerning how to read price action as well as implement a strategy to enter the new trend and take profits.

First, trade with the overall market by spotting days where there is accumulation taking place in the major indexes, particularly the Standard & Poor's 500. A market that is under accumulation will reveal itself by steady buying volume as institutional traders buy positions across the broad sector of stocks. This is an important concept in order to be sure that you are trading with the "wind at your back" because 70% to 80% of stocks follow the overall market's direction. This is also why the S&P 500 is so important to track because it is composed of the top 500 largest publicly traded companies in the US and reveals at a glance whether the larger market has buying power behind its upward momentum.

Second, bullish trends move in a series of higher highs and higher lows as price action advances in an upward direction. Higher highs can be identified by the wave-like motion it takes as it trades higher, setting new highs before pulling back slightly. Higher lows are almost the same due to when price pulls back from a new higher high, the significant low is set higher than the previous higher low.

This almost sets a series of steps as the market advances and indicates the normal ebb and flow of a stock that is in a bullish trend. See Figure 2.

FIGURE 1: JJG. JJG was on a steady downtrend until its bearish trendline was broken and its price action began to make a steady series of higher highs and higher lows. Prior significant high points offered resistance, but rising volume helped JJG continue higher as the new bullish trend took root.
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Third, after a stock has been in a bearish trend, identify when its downward trend is broken. Drawing trendlines serve as a good visual reference for bearish price action by drawing a line from the highest high point to the lowest high point without crossing any other price action to show the steady decline of a bearish trend. When price trades higher, breaking this trendline while also forming a higher high above the previous significant high point that has been set, it can be viewed as a possible price reversal in the upward direction.

Fourth, spot resistance levels as the stock begins to climb higher as price begins to reverse, marking a series of higher highs and higher lows in the price action. As price approaches these previous significant high points, they may pose resistance. These points may pose as resistance because short-sellers may be holding out at these price levels because this is where they first took a position.

As price hits these levels, it may trigger price stops, causing erratic trading as short-sellers get out of their positions or double down in the hopes of driving down price to avoid losses. Use these levels as profit targets or an indication to tighten up your stops, just to limit your risk in the event that they succeed in taking control of the direction of the stock and driving down price into a bearish trend once more.

As a stock advances into a beginning bullish trend, consider taking a position or adding to a position as price trades up from a higher low point and through the former higher high price point. But always be mindful of the relationship between price and volume. As long as buying volume is entering the stock and trending upward as an average, then the stock is likely to continue upward. But as always, use stop-loss points to avoid unnecessary risk and never risk more of your trading capital than your risk management allows for.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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