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Swing Charts

Defining Conditions

Must define how many dollars/what % the price must reverse in direction before we can define the reversal as a newly confirmed swing in the opposite direction. This number of dollars/percentage is known as the switch parameter.

For longer - term trends the characteristics are as such (look at the pullbacks):

Each successive pullback valley is higher than the previous one, we are still in a major uptrend (Fig 1a)
In an uptrend (fig 1a), thrust swings up are longer than the pullback swings down
Each successive pullback peak is lower than the previous one, we are still in a major downtrend (Fig 1b)
In an downtrend (fig 1b), thrust swings down are longer than the pullback swings up

Fig 1a

Fig 1b

Typical Market Swing Cycle

Accumulation

Sideways period with a rather narrow horizontal range of prices. Normally occurs when institutional investors buy over long periods of time, not a good entry point for retail investors

Initial Thrust

Initial increase in the number of buyers to push prices up. Rising prices attract more buyers and a significant price move upward (initial thrust)

Markup

After the initial pullback, a new upthrust occurs, with greater force and duration than the Initial Thrust. This is also the most profitable time to own the stock with the opportunity to let the profits run. Can use trending-trading strategies. This also results in some investors taking profits and even selling short, leading to a steep selloff.

Blowoff

Selloff is offset by buyers who missed out on the initial wave and using this opportunity to buy into the stock. This leads to the blowoff phase where extreme optimism drives a strong and rapid upward movement of prices

Distribution

Sellers outnumber buyers and price begins to collapse. Prices usually move down faster than they moved up.

Hope

A pause where there is a sharp pullback move back to the upside.

Capitulation

A period where prices collapse and make new lows (lower high and no new high), where sellers sell their holdings at any price. After the crash there is usually a period of dormancy, followed by step 1 and the cycle repeats

https://www.investopedia.com/articles/trading/08/stock-cycle-trend-price.asp

Note: The 5 & 6 (Distribution and Hope) phase is also know as the distribution phase in Investopedia and other investment journals.Steps 1, 3, 5 and 7 are the main framing steps in the Swing CycleBelow: Figure showing a typical Market Swing Cycle ChartSecond Picture: Elliot Wave Theory depicting the five-three movewhere 5 waves move in the direction of the trend followed by three corrective waves

Trend Reversals

Long-term downtrend reverses into an uptrend when the price is higher than the previous pullback peak for the first time
Uptrend reverses into a downtrend when the price is lower than the previous pullback valley for the first time
New uptrend thrust is at least as long as the previous downtrend thrust

(Can be linked to double, triple tops, heads and shoulders patterns)

Types of Transition Patterns

They are patterns that happen during the process of changing trend direction from up to down or down to up.

#1 Double Tops ("M's") and Double Bottoms ("W's")

Double tops often form at the end of uptrends
Double bottoms often form at the end of downtrends
The tops and bottoms are approximately the same height

Characteristics of Double Top

Second top is higher than the first. This occurs as traders place buy orders above the first peak, savvy traders will make use of this to force prices up above the previous peak (after the pullback) to trigger the buy orders. They then sell off to unwitting buyers before pushing the price down sharply.

Characteristics of Double Bottom

Many traders will believe that the previous downtrend have run its course and will buy in. They will then place protective orders below the low price of the first bottom.

Savvy traders anticipating the existence of a substantial quantity of contingent sell orders will then issue sell orders to force prices back down to levels lower than previous bottoms to cause previous buyers to sell out of a loss. They will tend buy up shares at a bargain and pushing prices up, before taking profits.

**Note about Double-Tops and Double Bottoms

Double top patterns don't necessarily mean that the second peak is high/lower than the first.

Adding indicators might help with supporting double tops

Volume analysis

If buying volume keeps coming in strong and hard each time it returns to test the top, then it gets likelier to break out upwards than to drop down

Likewise, if the volume starts drying up each time it returns to test the top, then it'll likely drop down as buying isn't coming in anymore

Support/Resistance Lines

This allows one to determine if its a true double top (2) and how the double top plays out (1)

Double tops and bottoms doesn't seem like the best reversal trend pattern, if the reversal pattern is not accurately identified, it can lead to a breakout rather than a reversal. This can be observed from the picture below:

#2 Heads-and-Shoulders Patterns and Triple Tops

Consists of 3 peaks
First Peak (Left Shoulder) and the Third Peak (Right Shoulder) is lower than the Second Peak (the Head)
Inverse head-and-shoulders pattern: The second bottom is lower than the first and third bottom, signaling the beginning of a significant uptrend after an extended downtrend
Triple Tops: The head is approximately the same height as the two shoulders

Drawing a neckline: A straight line connecting the two intervening pullback lows (or pullback highs in inverse head-and-shoulders). Crossing the neckline signals the beginning of a new major up trend (downtrend).

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