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SIGNAL –R1:  U-TURN

Here on this page you will learn about one powerful trend reversal signal. Few minutes spent on this page will go a long in impoving your success in trading. We will see this signal for two situations. One pointing a trend reversal from a downtrend to an up-trend and the other one pointing a reversal from an uptrend to a downtrend.
U-TURN (BUY)
U-TURN (SELL)

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Want to see the performance of this signal? Out of curiosity, I back tested both versions of this signal for the first half of 2004 on stockfetcher.com. For the U TURN (BUY) signal: Annualized Return on Investment (ROI): 22.82% versus the ROI of ^SPX was: 4.81%. (Click here for an EXCEL file with all details about his back-testing.) For the U TURN (SELL) signal: Annualized Return on Investment (ROI): 24.60% versus the ROI of ^SPX was: 4.81%. (Click here for an EXCEL file with all details about his back-testing)

(Note: If you get confused by some term(s) used on this page, you can look at that term by clicking on this link. Don't give up. Try to understand this signal because this can make you lots of money. Feel free to ask me a question or email me feedback.)

U-TURN (BUY)

U-TURN (BUY) is one of my most favorite signals. As mentioned earlier, the (BUY) version of U-TURN takes place when a stock is in a down-trend and is like to enter into an up-trend. It signals possibilities about the start of an up-trend.

Assume a stock is going down for quite some time. The following are quotes for the latest two days:

Yesterday, the stock opened at 25$, touched a high of 26$ and a new recent low of 23$, and at the end of the day it closed at 24$. Now today, when market opens, this stock opened at 22$ (a price lower than the Previous Day's Low price of 23$) and started going down. Now when it is trading as low as 21$, there are signs of fresh buying which pushes the price higher. Not a big thing so far because this kind of buying could be seen several times during any trading session. However, when the stock manages to trade higher than today's Open price or 22$, we need to be vigilant for a likely trend reversal. Now if the stock keeps going up and closes for today at say 26$, which is higher than both Previous Day's Open price of 25$ and the Previous Day's Close price of 24$, we have a trend reversal signal! The stock that has been going down for the last few days and also during first few hours today, somehow closed with a happy ending and a strong Close price. This reflects a 180-degree change in the sentiment. Hence we will call this signal a U-TURN (Buy) signal.

What makes U-TURN a powerful trend reversal signal?
As we know, when a stock is in a downtrend, sellers out-number or out-power buyers. In such circumstances, it is normal for the stock to keep making lower Low prices as time passes. This reflects bearish, negative sentiment or outlook for this stock. Now when trading starts for today, this stock opens at a price lower than Previous Day's Low price. This is in line and indicates continuation of the current bearish mood and reflects a further build up of negative sentiment. Now if at some point in time during the session, the stock stages a reversal and starts trading higher. This is likely due to an emergence of fresh demand at current low price of the stock. Now how can we determine that the stock is really staging a reversal? To answer this question, following tests can help us differentiate a strong reversal from a temporary emergence of buying. First, there has to be a noticeable increase in volume since this turning point. Second, it has to keep going up and cross Previous Day's Open and also the Close price. If both these conditions are fulfilled, we can be sure that the buying in the stock has been real and powerful. To take advantage of attractive current low level of stock price, some influential players seem to have started buying it decisively despite the strong negative sentiment held by most other players. This buying is significant because it not only absorbed what most players had to sell/offer, buyers kept asking for more stocks even at higher prices. Today's demand not only absorbed the selling pressure, but it even pushed the price higher than the prices of the Previous Day! Isn't this a convincing reversal in stock prices?

This is a complete U-TURN (BUY) in the stock price trend and now with a Stop-loss at Today’s Low price, one can start taking long positions.

These are the conditions required for the U-TURN (BUY) signal:

1. The stock has to be in a continued downtrend
2. Today’s Low price (TDL) has to be the LOWEST price for the stock over the last few days.
   (If it is the lowest for last few weeks, we are likely to have a strong major trend reversal signal- a strong form of U-TURN. However if Previous Day’s Low price is the lowest for only last three to ten days, we have a signal that is more likely to mark the beginning of a Correction or the end of a Reaction – a weak form of U-TURN).
3. Today’s Open price (TDO) has to be LOWER than Previous Day’s Low price (PDL).
   TDO < PDL
   The more the difference between PDL and TDO, the more powerful the signal is going to be.
4. Today’s Close price (TDC) has to be HIGHER than Previous Day’s Close price (PDC).
   TDC > PDC
5. Today’s Close price (TDC) has to be HIGHER than Previous Day’s Open price (PDO).
   TDC > PDO
6. Today’s Volume has to be decisively HIGHER than the normal volume over the last few days or Previous Day’s volume. If the above conditions were fulfilled, you would most likely see a decisive jump in stock volume today. If you don’t see a jump in the volume today, the signal loses some of its strength.

Key Points to remember: Current Trend- Down. Weak Open. Strong Bull Day. Increase in Volume.

Stockfetcher.com syntax: "Show stocks where Close gained more than .15% percent over the last 1 day and open is more than .25% below the low 1 day ago and close is above the open 1 day ago and LOW reached a new 4 week low and volume gained more than 20% over volume 1 day ago"

Here is an example: See the prices below for PCS (Sprint PCS Co.) during May 2003.

ACTION: There are two primary variations of this signal as regards to Condition 2. The signal can take place at the end of a major trend as described above for PCS or it can take place at the end of a Correction or a Reaction.

In the first scenario, U-TURN (BUY) - in a Bear Market - is usually a very powerful signal and has the strength to change the current major trend from down to up-trend. Here you can expect the stock price or index to go up to the tune of 20%! So as soon as you have a U-TURN (BUY) in a major trend, you should be convinced of a trend reversal; and close short positions and you can also initiate fresh long positions to take advantage of this new emerging up-trend. So here in the case of PCS, Today's Low price was the recent lowest price so the U-TURN (BUY) today was likely to end the current down trend and initiate an up trend in PCS stock prices.

In the second variation, U-TURN takes place somewhere in the middle but not after a sustained trend. So Today's Low price may be the lowest price for only the last three to ten days, but not for the last few weeks! So the signal here may just mean the beginning or end of a Reaction/Correction. So what do you do here? You should not expect as much gain as you would in the first variation, but you can make new trades to take advantage of the price movement over the next three to ten days. If you understand major trends and Reactions/Corrections in prices, you will be able to distinguish these two variations and trade accordingly.

STOP-LOSS: As with any trading system, you must be alert to getting out of a position if the stock moves contrary to your expectations. The U-TURN signal works best most of the time but not always. If I were pressed for a figure, I would say it is correct around 70% of the time. However it also fails sometimes. So you should be watchful to protect yourself by selling your long position if the prices start going down. When to quit the position and book losses? It really depends on your risk-tolerance but I would advise you to keep a Stop-loss at Today's Low prices (minus 1%). Here in the case of PCS, we would keep a Stop-loss at 3.47.

See on the full Chart of PCS below for what happened after the signal took place:
After giving a strong reversal U-TURN (BUY) signal on the 16^th, the stock was little idle for the next two days. This was an opportunity for people like us to take a long position. Then on the next day the stock jumped up again and took us to our target of 4.20. On the next day, the stock continued its up movement and closed around 4.50 and then rested for some time. Then after few days it restarted its journey and ultimately it went as high as 6.50 within a month!

The beauty of this signal is that it tells you to take a position on the very day the stock is changing its course. You don't need a computer or fancy software to find occurrence of this signal or other signals discussed in this book. You can check for my signals just by looking at the daily prices of the stock on some websites. You can go Online and watch (and also download from the link at the bottom of the page) current as well as historical prices or charts on many website. Here is a link for viewing historical stock prices for any stock on Yahoo! (http://finance.yahoo.com/q/hp?s=AMZN)

Here is another example... Look at the chart of CNTY below for one more example of U-TURN (BUY) signal. Take a note of increase in volume on the day of the U-TURN (BUY) signal. An explosive up-trend in the prices was seen immediately after the signal, which gave 80% return over just few weeks! Who would not like to ride this kind of trend from the very first day of its beginning? (You have not learnt about GAP signal yet but come back to this page after you learn it.)

"Chart courtesy of StockCharts.com"

U-TURN (SELL):

Now let us look at how this powerful signal works in a reversed situation. Like the U-TURN (BUY) signal in a Bear market, U-TURN (SELL) signal is equally powerful to indicate a change in trend when a stock is going strong and is making new higher prices (in a Bull market). All of a sudden in a Bull trend the stock puts up a disappointing down day and surprises most people. Many people think this as just a Reaction and expect the stock to resume its continued ascending movement soon; but it does not happen most of the time when the reversal conditions of the U-TURN (SELL) signal are met.

Here are the conditions for the U-TURN (SELL) signal with Bearish implications in a Bull market. Please note that the signal discussed here takes place when the stock is in a up-trend (Bull market) but the signal actually indicates that the stock is about to enter into a Bear market or a down trend.

1. The stock has to be in a continued UP TREND.
2. Today’s HIGH price (TDH) has to be highest price (TOP) for the stock in last few days.
   (If it is highest for last three or more weeks, we have a strong form of a U-TURN (SELL) signal. If it is highest for last three to ten trading days, we have a weak form of U-TURN (SELL) signal. The strong form indicates a likely trend reversal for the current major trend; and a weak form is related to just the start of a Reaction or the end of a Correction.).
3. Today’s Open price (TDO) has to be HIGHER than Previous Day’s High price (PDH).
   TDO > PDH
   The more the difference between TDO and PDH, the more powerful the signal is going to be.
4. Today’s Close price (TDC) has to be LOWER than Previous Day’s Close price (PDC).
   TDC < PDC
5. Today’s Close price (TDC) has to be LOWER than Previous Day’s Open price (PDO).
   TDC < PDO
6. Today’s Volume has to be decisively HIGHER than the normal volume of the last few days or Previous Day’s volume. If the above conditions are fulfilled, you would mostly see a decisive jump in stock volume today. If you don’t see a jump in the volume today, the signal loses some of its strength.

Key Points to remember: Current Trend- Up. Strong Open. Strong Bear Day. Increase in Volume.

Stockfetcher.com syntax: "Show stocks where Close dropped more than .15% percent over the last 1 day and open is more than .15% above the high 1 day ago and close is below the open 1 day ago and high reached a new 3 week high and close is above 2 and volume is more than 20% above volume 1 day ago and volume is above 500000"

ACTION: There are two primary variations of this signal with regard to Condition 2. The signal can take place at the end of a major up-trend or it can take place at the end of a Correction.

In the first scenario, U-TURN (SELL) is a very powerful signal and has strength to change the current major trend from up-trend to downtrend. Here you can expect the stock price or index to go down to the tune of 20%! So as soon as you have a U-TURN (SELL) in a major up trend, you should be convinced of a trend reversal; and you should close Long positions and you can also initiate fresh Short positions to take advantage of this new emerging down-trend.

In the second variation, U-TURN (SELL) takes place somewhere in the middle but not after a sustained trend. So Today's High price may be the highest price for the last three to ten days, but not for the last few weeks! So the signal here may just mean the beginning or end of a Reaction/Correction. So what do you do here? You should not expect as much drop in prices as you would in the first variation, but you can make new trades to take benefit from the price movement over the next three to ten days. If you understand major trends and Reactions/Corrections in prices, you will be able to distinguish these two variations and trade accordingly.

STOP-LOSS: When to book losses in U-TURN (SELL) signals? It really depends on your risk-tolerance but I would advise you to keep a Stop-loss at Today's High prices (plus 1%).

Let us see this with an example:

Thus we had a perfect U-TURN (SELL) signal on TiVo. If you were following this signal, you would have easily sensed profit taking that happened in TiVo on that day and also would have sensed the intensity of supply/selling in the stock. It was obvious that despite the recent up-trend, sellers did not mind selling positions or shorting the stock even at lower prices during the day!

I would also like to mention one more U-TURN (SELL) signal on the Chart above. If you look at the beginning of June, there was a U-TURN (SELL) signal at a previous TOP price (slightly above 10$). This U-TURN signal did end the up-trend but the stock did not enter into a clear downtrend here. It just got into a Sideways-trend. Thus you can see how U-TURN temporarily stops a major trend and starts a Reaction. Now if you look a little further to the right (toward end of the sideways movement), you will see a big white candle. This was probably another U-TURN (BUY) signal (from bear to bull trend, with Bullish implications). However the day’s low price wasn’t the lowest price for the last few weeks! So it was a weak U-TURN (BUY) signal (Variation 2 discussed above) and was just pointing to the end of the Reaction and a resumption of stock price movement in the direction of the major trend- an up trend.

Some more signals if you have familiarized yourself with the other signals discussed in this book. You should be able to identify a RESTART signal (discussed later) at the end of the first Reaction in the Chart above- around the 6$ level. See how it marked the end of the Reaction and restarted the price movement in the direction of the major trend!  Also there is also the failure of a TURN-AROUND signal on June 30^th (three days prior to the major U-TURN (SELL) signal we have discussed in the beginning of the section).

Let us now look at one more example of U-TURN (SELL) Signal.
"Chart courtesy of StockCharts.com"

Look at the chart of Nike, inc. (NKE) for the U-TURN (SELL) signal. As soon as we had our signal, NKE showed end of its up-trend and entered into a nice downtrend. There wasn't any bad news about the company which prompted the down-trend but it was probably action of some influential investors who might have seen this high price of 77$ as an opportunity to book profit or maybe they were smart hedge funds or short sellers who had started selling NKE!!! It does not matter for us who were behind this sell-off but our U-TURN (SELL) signal did tell us about this beginning of the fall in prices on the day when the stock hit its High price! We have not yet learned about TURN AROUND (SELL) signal but you will find an instance of that signal few days prior to U-TURN (SELL) signal on the chart. If you notice, the TURN AROUND (SELL) signal was also effective and its stop-loss was never triggered. Thus, after TURN AROUND (SELL) signal, when we had U-TURN (SELL) too after few days at the same Top prices, there was money for us in short selling NKE during April 2004!

Here is one more example of a U-TURN (SELL) signal. As shown on the Chart on the right, NVLS stock was in a strong up trend. When it was around the High of 35$, company came out with stellar earnings. The stock was traded higher in after-markets. It also opened strong on the next day but closed significantly lower with a significant increase in volume. This was our U-TURN (SELL) signal. See on the chart, how the stock changed its course and touched a Low price of 28$ within 2/3 weeks!

Let us know discuss our second major trend reversal signal- WEEKLY REVERSAL.

If you want to look at a sample Short-term trading signal, you can click on the Short-term signals button on the top or click here.