HALF-SIGNALS

On occasion, we are left in doubt

whether a trend has reversed. In

Figure 3, we see that at point X

the latest trough breaks below

its predecessor, but not the latest

peak — and only half a signal

has been given. What is now

required is for a fresh rally to

peak below the previous top and

for the price to slip below the

previous low at point Y. This is

a much less timely signal because

the price will have already

fallen from the final high; but by

the same token, the probabilities

of it being a valid reversal

are that much greater. Anyone

not waiting for the signal at Y

would have run the risk of being

left out of a powerful rally such

as the hypothetical one shown

in Figure 4. In that instance,

prices rose and made a new peak,

indicating the trend had never

reversed in the first place. Halfsignals

also appear when a trend

reverses from down to up.

Peak and trough analysis

should be treated as only one

indicator among many in a technical

arsenal. You would not

normally rely solely on a moving

average crossover, oscillator

signal, or trendline violation

to justify entering a trade; similarly,

peak and trough should be

used in conjunction with other

indicators.

The difference with peak and

trough analysis is that indicator

for indicator, it generally offers

a stronger signal than most trendfollowing

techniques. This is

because technical analysis is

very much concerned with the

psychology that underlies price

movements. The fact that a reversal

from a downtrend to an

ANDREW