Last year, I wrote about a method called the “2B Method” developed by Victor Sperandeo, a successful hedge fund manager and author.
The 2B Method is used to spot price reversals across a broad selection of securities.
The method is effective because it is simple to understand and follow.
Its rules are as follows:
1) A trendline is broken by price action.
2) A trend, if bullish stops making higher highs and higher lows in its price action. If bearish, it stops making lower high and lower lows in its price action.
3) Prices rally above a previous short-term minor price high in a bearish trend, or rally below a previous short-term minor price low in a bullish trend.
In mid-August of last year, the Dow Jones Industrials (DJIA) hit an all-time price but then began to decline. On September 9th, the price began to make lower low and lower highs confirming that the DJIA was in a short-term bearish move.
Drawing a trendline from the high of 8-15-16 to the high of 9-22-16 then extending it (see the green extension on the trendline) you have a frame of reference for the price movement.
On 10-10-2016 (Point A), price attempted to breakout to the upside but failed to follow-through. The DJIA declined again, setting a new price low and retesting support set on 9-14-16 (Point B). Price went on to flirt with the downward trendline but made no serious attempt to break higher.
However, on 11-1-16, and over the next several days (see Point C), you see the DJIA make an attempt to drive the price lower and fail. The moment price trades back up above support is the signal that a 2B reversal has taken place.
For confirmation, you would just have to wait for the trendline to be broken which occurred on 11-7-16 (Point D).
Two days later, the DJIA’s price action followed through on almost twice the average 30-day volume level.
Today, the DJIA went on to gain almost 1800 points since the breakout confirmation signaled by the 2B method.
Billy Williams is a 20-year veteran trader and publisher of www.StockOptionSystem.com, where you can read his commentary and a report on the fundamental keys for the aspiring trader.