Using Large Moves to Identify Trend Reversals – House and Semi Checks | chart of art

Trends often start with large movements. But how do you measure and identify such movements? Chartists can use the ATR Trailing Stop SAR indicator (ATR-SAR) to measure movement in Average True Range (ATR) terms. ATR is a volatility indicator developed by Welles Wilder. For example, a rise of 4 ATR from a low indicates a large-scale move that could start an uptrend. Conversely, a 4 ATR drop from the high indicates a large-scale move that could start a downtrend or correction period. Today’s report will highlight the sharp decline in the Home Building ETF (ITB) and show this indicator against the Semiconductor ETF (SOXX).

ATR-SAR is the bull/bear version of the ATR Trailing Stop, both are part of the TIP Indicator Edge plugin for StockCharts ACP. SAR stands for “stop and reverse,” meaning the line switches with a price break. When the price rises, ATR-SAR is green and below the price. This acts as a tracking stop for a buy position or an uptrend indicator. When the price is falling, ATR-SAR is red and is above the price. It then acts as a stop for short selling or bearish indications. Let’s look at an example that uses 22 periods for the Average True Range and 4 for the multiplier.

The chart above shows the Homebuilding ETF (ITB) including ATR-SAR(22,4). ITB turned green in November with a surge and huge uptick. The ATR-SAR line turned green and held a value of 4 ATR(22) above the highest close as the price rose. ITB fell sharply this week, breaking the ATR-SAR line. This indicates a large decline that could trigger a downtrend or correction.

A large decline can start a downtrend, and a large rise can start an upward trend. ITB held this ATR-SAR line from early November to early April. The decline during this period was less than 4 x ATR(22) value. The April decline broke this ATR-SAR line. This means that the drop was greater than the value of 4 x ATR(22). In other words, there was a huge decline. Also note that the huge rally in early November triggered the upward trend.

Elsewhere, EW Consumer Discretionary ETF (RSPD) and Retail SPDR (XRT) also plunged, breaking the ATR-SAR(22,4) line. This was highlighted in Thursday’s report and video from TrendInvestorPro. This means that the three economically sensitive groups (Consumer Discretionary, Housing and Retail) have reversed their upward trends this month. Elsewhere, the Software ETF (IGV), Cybersecurity ETF (CIBR), and Cloud Computing ETF (SKYY) broke the ATR-SAR line on February 21st. Technology SPDR (XLK), Mobile Payments ETF (IPAY), and Semiconductor ETF (SOXX) have yet to break the ATR-SAR line. The chart above shows that SOXX is doing better than ITB.

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