A three-event trendline reversal checklist

The teaching problem

The teaching problem is not whether a strong advance or decline can end. It is how to wait for the market to invalidate its own trend twice, via a trendline break and a failed retest, rather than fading solely because a move looks extended.

How the lines are drawn

For an advance, a correctly drawn trendline joins the lowest low to the highest low immediately before the highest high without crossing intervening price bars. A horizontal resistance is then placed at that highest high and a horizontal support at that highest low.

Those support and resistance levels bound the later retest and mark where a close would complete the reversal.

Three conditions on the December note

The first reversal condition is a break of that trendline. In the December 10-year note case, the line was broken by a downside gap on October 15.

The second condition is a failed retest. After the trendline breaks, price cannot recover the old extreme and therefore fails to restore the prior trend's momentum. In that note case the contract peaked on November 11, and the down day on November 14 was treated as the first usable confirmation of that peak.

The third condition is a close through the nearby horizontal support or resistance. That close is the breakout that completes the sequence. In the note example that support sat near 112, and the illustrated short after condition 2 sat just below the November 14 low near 113, with a protective stop above the high near 115.

A first measured-move objective

A measured-move sketch took the distance from support at 112 to resistance at 116.35, about 4.35, and subtracted it from support to estimate an objective near 107.65 if the third condition completed. That distance is the span from the recent correction low to the trend peak, projected beyond the broken horizontal level to sketch a first objective.

The same sequence in December wheat

December wheat followed the same sequence. A trendline break arrived in early October. A rally from below 366 then stalled just above 412 without a new high. The trendline was broken again on November 5, with a close at 400 6/8.

When the second proof fails

The S&P 500 met the first condition with the November 7 to 11 decline and found support near 870. Condition 2 required a failure to exceed the November 6 high of 926.50, but on November 22 the index printed an intraday high of 937.50.

Editorial reading: because the old extreme was recovered, the failed-retest proof did not stand, so the reversal case was not rewritten by a later breakout.

A brief move through a horizontal barrier that then fails to follow through and closes back on the other side of that level, around 925 in the S&P illustration, can be classified as a bull or bear trap rather than a confirmed continuation. A bull trap is that pattern when the brief push is through resistance and the close returns below the barrier.