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Chapter 10. Putting It All Together: Org... > The Third Step: Establish the Direct...

The Third Step: Establish the Direction and Strength of the Current Intermediate Trend and Try to Project the Time and Place of the Next Intermediate-Term Reversal Area

Useful tools for this purpose include these:

  • MACD (Chapter 8): Maintain weekly and daily MACD calculations. Look for trends in MACD, positive and negative divergences, slopes of rises and declines in MACD, and particularly trendline breaks in the slopes of moving average lines. Slow MACD is very useful in this regard.

  • Moving average trading channels (Chapter 9): These work well in conjunction with MACD and also on their own for intermediate trend as well as shorter-term and longer-term trend analysis.

  • Rate of change indicators: Ten-day rate of change measurements, 21-day rate of change measurements, and others (see Chapter 3) provide perspective on whether trends are gaining or losing momentum. Look for positive and negative divergences between market momentum and price for early notice of stock market reversal.

  • Market breadth indicators: Advance-decline lines of major exchanges, as well as the numbers of issues rising to new highs or falling to new lows (see Chapter 6), should be followed for indications of the strength of breadth during market advances and declines. It is unusual for the stock market to undergo significant decline during periods of strong and improving breadth. Look for improvements in new high/low relationships as a precursor to the completion of market declines, to slippage in these areas as an early warning of market decline to follow.


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