Spot Corrections Before They Start

05/30/2012 2:00 pm EST

Focus: STRATEGIES

Toni Turner

Author, Short-Term Trading in the New Stock Market

Select leading indicators and multiple time frame analysis can help traders anticipate corrections within strong uptrends, says Toni Turner, and fear and greed play an important role, too.

What to look for in an uptrending market. I’m here with Toni Turner and we’re going to talk about some of the indicators that are looked at when the markets are uptrending.

Let’s think of the S&P 500. When it comes out of a volatile period, which is typical—or maybe it’s not volatile, maybe it’s a more consolidating period—but when it starts up and moves higher, there are some things we want to watch so we can get idea of when it might take a rest.

Like a long distance runner has to rest at some point, when it might pull back and people will start taking profits, because that’s the natural thing to do.

Keep an eye on former resistance on daily charts and weekly charts.

People say, well, what’s the big deal about resistance? If we think through what it really is though, it’s people who bought higher who have been worried and scared because the market fell.

Now it’s coming back up, and they are saying “Hey, how I can get rid of this thing and come out even and not have to worry about it anymore?”

There is hope. We have to see when the market gets to that point, whether the demand can absorb the supply from the people who are selling, or whether it cannot. In that case, there is some profit taking and some people selling and the market pulls back, or whether it moves higher.

And there are all kinds of ways to tell.

There is volume. Volume throws off wonderful signals, like the on-balance volume (OBV) indicator. We have MACD, RSI, Bollinger bands, and we have all of the indicators on our charts that when we learn to read them properly, can indicate whether there will be a pullback here.

See related: OBV: Perfect Indicator for All Markets

Hopefully it’s nothing more than a pullback; hopefully not a complete reversal. Although that happens too, and for that we look for specific patterns, or maybe it’s something as simple as a stock or an index that can’t make a higher high.

There are probably ten or 20 things we can look for to tell if there’s going to be a pullback and what kind it’s going to be.

And probably, when you get back to that place where investors might want to dump after they’ve bought high and now they’re worried about the stock, there’s also the greed factor, right?

Then there’s the greed factor, and the money managers. Also, where are the individuals who have missed this big run up?

We have to see with what strength they come into a pullback. Do they come in and start buying and cause so much demand that they absorb the supply and shoot it higher?

There are so many dynamics going on at one time, plus news, economic reports, earnings, and on and on.

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