Trend Reversal - How can we tell?

Trend tends to continue once it is underway but there will come a time when the trend reverse. The question is how can we tell? We can wait for the Moving Average (MA) line to change direction or a trendline break but by the time that happened the new trend would be well underway. Is there a technical signal that can give us an early indication. The answer is yes. What we need to look for is divergence between a technical indicator and price. There are many technical indicators to choose from but I opt for Gerald Appel's Moving Average Convergence Divergence (MACD).

Dow Jones Industrial 30 Index Weekly Chart on 12 Jun 09

I will show the weekly chart of Dow Jones Industrial 30 Index (DJI) to illustrate this point. DJI had been in a downtrend since mid Oct 07 until end Mar 09 when a downtrend line break suggesting the start of of an uptrend. The subsequent weeks DJIA had been heading higher. There was a technical clue that could have alerted us of this trend change earlier - Positive divergence between MACD and Price from end Nov 08 to early Mar 09. Price made a lower low in early Mar 09 than the previous low in end Nov 08 but MACD traced a higher low.

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