The familiar saying “the trend is your friend, until it ends,” still stands, relevant and usable, but like a reliable pair of old, worn-out shoes; ones you can’t get rid of, perhaps because they still seem to fit, they still feel comfortable, or maybe it’s just that you’ve just normalized their discomfort and poor functionality.
A trend can be viewed clearly across extended periods of time, but time viewed across extended periods can give you more than one trend.
A trend organizes fluctuations, absorbing them into the perception of a single direction; but in every fluctuation exists the potentiality of multiple directions that go against the organizing principle or perception of a single trend.
In short, trends and microtrends can often conflict. And when that happens, which one might you favor over the other?
Let’s take a look at Aurora Cannabis (ACBFF). This stock clearly illustrates the problems you can encounter when a “technical” trend and microtrend disagree.
This chart shows us both an active down trend (A to E) and an active upwards microtrend (1 to 6).
- While there is a sign that the downtrend may be “weakening,” there’s no sign that it is reversing.
- While the uptrend appears quite clear and distinct, it is still taking place within the context of a larger downtrend.
Let’s break this down, swing point by swing point:
Trend: Down
The most current downtrend starts from its highest peak at (A), establishing a trough at (B).
If this truly were a downtrend, you would see a lower high, which did take place at (C), and a lower low, which appears slightly at (D).
(D) is the critical point: although it did establish a “lower low,” it did not penetrate far below the price point of the precious low (B).
Technically, however, price is still in a confirmed downtrend as the most recent swing high at (C) hasn’t been violated. For this downtrend to continue, it would have to break well below (D), which, as far as we can tell, might or might not happen.
Microtrend: Up
As we said earlier, (D) marks a potential weakening of the downtrend. If we were to have viewed it as a possible change or reversal, we would have followed price action from that point, tracing its low at (1) and following what it might have done after peaking at (2).
The next swing low at (3) did not violate support at (1); an indication that price may be trending upwards if price would break out above (2).
As it turns out, price did break above the recent swing high (4), and the following swing low at (5) remained well above the previous point at (3). Now, it appears as if price is breaking above (4), strengthening our bias toward the upside as long as the next swing low stays well above (5).
So how do you trade this?
We’ll cover that in our next installment.
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