Bearish Signals that are not Bearish

Bearish Signals that are not Bearish

Submitted by adil on Tue, 07/01/2014 - 17:30

Analyzing Signals and Market Indicators Correctly

The job of technical analysts is to explain and understand the signals and market indicators. Signals usually define the profits we can earn or the losses we can suffer if we go wrong. As a trader, you are required to identify these signals by analyzing the market and observing the prevalent trends, because signals don’t pop up by themselves. In a candlestick pattern, for example, the white and black candle appears at any given point of time for any possible reason. So, does it mean the trend will alter if there is an upward trend in the market and a black candle occurs? Of course not! It does not happen, at least not more than the selected oscillator that extends against the current trends prevalent in the market. It is not easy for a new trader to understand that any indicator might form bearish or bullish signals at a certain period of time because they end up misinterpreting the signals and keep reversing their position when in fact they were trading correctly.

Therefore, whether you are a new entrant in the market or an expert trader, there are certain factors that you need to consider before reversing your position. These factors cater both the bullish as well as the bearish market. But here, we will be discussing from the perspective of bearish signals in an upward trending market.

Time Period

The first thing that a trader should consider is a time period. It is one of the most important factors when you are trading in the market as it influences your every move as a trader. Every trader knows that short term trends are not as strong as the long term trends and so, the bearish signals on the weekly price chart will be stronger as compared to a daily price chart. For example, let’s assume that both signals have the same time duration and take approximately 2.75 bars to reach the peak level. In that case, the long term signals will extend about 3 weeks in length as compared to short term signals that will take 4 days or so. However, the long term signals can show a downward trend because of its distance and its depth, and can result in considerable reversal or correction. The short term signals, on the other hand, represent the temporary break in the market or near term jitters of the market.

Resistance & Support

These are two very important factors that should be considered when you are evaluating the downward signals. The actual bearish signals are the ones that form below the resistance instead of the ones that form above the support level.

So what is Resistance and Support? Resistance is a point where the signals come to a halt or reverse. The market comes across different types of signals when there is an upward trend in the market, such as, long term signals, near term signals and short term signals. Moreover, there is also a fundamental, technical and psychological resistance. All of these can create downward signals, but most of them will not be bearish. The key to understand the bearish signals at resistance is to understand the time period or the time frame as it tells you how bearish the signals are. High bearish signals represent reversal or correction, whereas, less bearish signals represent consolidation or pause.

On the other hand, signals that appear at support during an upward trend usually indicate the bullish behavior. They give an impression of bearish behavior that confirms the existence of support and increasing asset prices. There are different types of support in the upward trending market, such as, technical support that can be seen as moving averages, consolidation bands, or previous peaks. Moreover, it also has long term, near term or short term support. If there is an upward trend in the price of a financial asset, a bearish signal is expected to lead to a buying point and will not an actual bearish signal.