No trend lasts forever, and recognizing early signs of weakness can help traders protect profits and reduce exposure before a stock reverses. These signs, when taken in context with the overall price cycle, provide clues that the stock’s momentum may be fading. While no single signal guarantees a reversal, combining them with other technical indicators strengthens your decision-making process.

This lesson will outline key indicators of weakening trends, how to interpret them, and why context is critical for understanding their significance.

Key Signs of a Weakening Trend

Relative Weakness Over Multiple Days

• What It Is: A stock underperforms the broader market or sector for several consecutive sessions
• Why It Matters: Consistent underperformance, especially in a leading stock, may indicate an issue like distribution or fading institutional interest
• Example: A Chinese telecom stock like NQ Mobile showed relative weakness for three to four days before a major negative event, tipping off traders to exit early

Loss of Respect for Moving Averages or Trendlines

• What It Is: A stock that consistently respected the 10-day or 10-week moving average begins to trade sideways or dip below it
• Why It Matters: This change in character may suggest that the stock is losing momentum
• What to Do: If the stock breaks below the consolidation lows following this behavior, it may signal the end of the trend

Multiple Concerning Candles

• What It Is: A cluster of negative candlesticks (e.g., Shooting Stars, Hanging Men) forms over several days or weeks
• Why It Matters: Consecutive warning signs are often more meaningful than isolated candles, especially when paired with volume

Top Tails Across Multiple Days

• What It Is: A series of candles where the stock takes out the previous day’s high but fails to close near the highs
• Why It Matters: Indicates buyers lack conviction or strength at higher price levels
• What to Watch For: A consistent inability to hold new highs often precedes selling pressure

Slowing Rate of Change

• What It Is: The stock’s upward momentum becomes less aggressive, with smaller daily price gains or sideways movement
• Why It Matters: A gradual loss of momentum may indicate reduced buying interest or growing seller pressure

Putting It Into Context

The significance of these signals depends on where the stock is in its price cycle:

1. Near Key Moving Averages: If these signs appear while the stock is extended from the 10-day or 10-week moving average, they are more likely to signal a reversal
2. Early in a Move: Negative candles like Shooting Stars in the first few days of a breakout may simply reflect short-term profit-taking by swing traders, not an end to the trend

Practical Applications

Confirming Your Exit Strategy

• If your plan is to sell on a break of the 10-day EMA, multiple warning signs (e.g., clusters of top tails or loss of trendline respect) can encourage you to act more decisively when that break occurs

Adjusting Your Position Size

• Use these signals as justification to reduce exposure, especially in extended conditions. For example, take partial profits after seeing consecutive top tails and a bearish reversal

Protecting Profits from Surprise Events

• Relative weakness over multiple days could signal deeper issues, such as unfavorable news or institutional selling. Proactively reducing your position can protect gains before the full impact is felt