Thank you for all your good work, could I ask what you mean when you say trend ending characteristics?

Eoin Treacy's view

Thank you for this question which is a major topic of conversation at The Chart Seminar. The easy way to think about it is that a consistent trend is a trend in motion and that reflects an imbalance between supply and demand. The rhythm of a trend should be easy to identify as long as it is consistent. When the consistency changes, that tells us the imbalance between supply and demand has changed. It is then we ask whether the conditions have changed enough to represent top formation characteristics.

What follows is a cursory description but to gain a more in-depth understanding I would recommend reading my book Crowd Money and attending The Chart Seminar. Considering where we are in the market cycle I’ll focus on top formations.

Acceleration is the first trend ending characteristic because it expends the available demand in a quick period of time and is dependent on new buyers turning up to participate. That is unsustainable beyond the short-term and increases the risk of a reversion back towards the mean.

An example would be Nvidia which has accelerated on a number of occasions over the last couple of years. This highlights that an acceleration is an ending of indeterminate duration.  

The 2nd top formation is often characterised by a loss of momentum but a massive reaction against the prevailing trend is its defining characteristic. The market pulls back when a vacuum of demand is penetrated below a range and some investors tend to be so shocked by the event they tend to stop buying. We often see a range occurring subsequent to the massive reaction which could be considered a first step below the top.

The tops we saw in 2007, for the example on the DAX, are examples of Type-2 tops where there was a marked loss of momentum, followed by a massive reaction in January 2008. It formed a five-month range below the top before breaking downwards.

The 3rd top formation never starts out as a Type-3 but morphs into it. It might start out as an acceleration and be followed by a Type-2 massive reaction but then moves into lengthy volatile ranging. Alternatively, it could lose momentum, pull back, rebound and range in a lengthy volatile manner. Either way the Type-3 top is characterised by ranging, time and size.

Crude Oil’s acceleration to $120 in 2011 was a Type-1 ending characteristic but gave way to almost four-years of ranging which was an example of a Type-3 before it eventually broke downwards.

The big question to ask today is whether we see evidence of Type-1, 2 or 3 trend endings on Wall Street which has been leading in this cycle. So far, we have seen a consistent trend evolve over the last two years but the pace of the advance is steepening. The Dow Jones Industrials in particular is widening its divergence from the trend mean and this medium-term bull market could climax in an acceleration.