Sunday, July 8, 2007

Spotting tops

First off let me say right up front that accurately calling tops is a fools game. It can't be done with any consistency. Ahh how many bears just keep getting this lesson taught to them over and over. However there are a few things to look for when we do get the odds in our favor. By in our favor I mean the COT is extremely short. First off as I've mentioned before I want to see divergences on the weekly charts. If the COT is short and we're getting divergences then we can zoom in to the daily charts. Victor Sperandeos sited the 4 day rule. This works equally good for tops and bottoms and all it says is after a long intermediate move 4 days in the opposite direction often signals a trend change. He also points out a similar signal which he calls the 4 day corollary. This rule states that after a long intermediate move and the market has 4 or more days in the direction of the trend then the first day in the opposite direction can often signal a trend change. Both of these rules make sense when you think about them. When you get 4 or more days in the direction of the trend at the end of a long move this often signifies the bullish or bearish sentiment has reached an extreme level. The first day in the opposite direction is a sign that the move has exhausted itself. The same rational works for the 4 day rule. After a long move if you can't even get one day back in the direction of the trend after 3 counter move days it's a pretty good sign the trend is over. Let me emphasize the word LONG intermediate move. Don't try to apply these rules when a trend has only begun. They won't work. As a matter of fact neither one of these rules are by themselves very good at spotting tops. When we combine them with the COT and divergences though we at least have a fighting chance of getting close to the top.