Even novice traders know how the attempt to jump into the last car of the outgoing train can end. Full loss of deposit. It’s even more annoying when you understand that it was not about a reversal of a previously existing trend, but about the dumping of ballast. The trend is restored, and the player realizes that he was circled around the finger.
When everyone buys, the big fish starts looking for sales opportunities. The activity of “bulls” leads to an acceleration of the trend, which is expressed in an increase in the angle of its inclination. According to Thomas Bulkovsky, if the angle increases one and a half times or more, the first condition for the formation of the pattern “Burst and U-turn with acceleration” arises.
The author distinguishes between several stages of model formation, including the Introductory and the Burst Stage. Along with different tilt angles, an important sign of an imminent turn is the twofold excess of the Stage Burst maximum by the maximum of the Entrance Stage. The short position is entered at breakthroughs of diagonal support, protective stop orders are placed at correction peaks and then pulled up to current prices. If the trend reversal really occurs, then due to the long retention of the short, you can capture a decent profit.
The pattern “Surge and U-turn with acceleration” also has a third condition, which was not observed in the oil example. We are talking about the duration of the stages of model formation. The introductory stage, as a rule, lasts several months, the Burst Stage – several weeks. It was during its course that the market plankton tries to drop into the last car of a train leaving for the north.
In the case of the S&P 500, this condition is met. The introductory stage for the US stock index lasted from February 2016 to April 2018 (26 months), the Burst Stage lasted from April to September 2018 (more than 20 weeks).
Together with an increase in the trend angle from 31 to 45 degrees, it could be assumed that the “bullish” trend in the US stock market is giving way to the “bearish” trend and begin to implement the sales strategy within the framework of the “Burst and U-Turn with Acceleration” pattern. Short positions, as in the case of oil, opened at the breakthrough of diagonal support lines.
S&P 500 really lost as a result of the rollback more than 20%, which, according to the principles of technical analysis, is considered to be the transfer of the asset under the control of the “bears”. At the same time, the condition of doubling the maximum of the Stage of the Burst of the maximum of the Entrance Stage to a maximum was not met. This would allow the trader to make a conclusion about a false breakdown. Players familiar with the “ Pit and Acceleration ” pattern could take advantage of this opportunity and take long positions on the US stock index on the breakthrough of the diagonal resistance line.
Thus, in order to be sure of the reversal of the existing trend, it is necessary to fulfill all three conditions for the formation of the “Burst and U-Turn with Acceleration” pattern:
- the angle of inclination of the Burst Stage should be 1.5 or more times greater than the angle of inclination of the Entrance Stage
- the maximum of the Burst Stage should be 2 or more times higher than the maximum of the Entrance Stage
- the duration of the Entrance Stage should be several times longer than the duration of the Burst Stage.
If only two of the three conditions are met, the breakdown is considered false, and the trader should look for an opportunity to open a long position.