What are Counter Trend Rallies?
Counter Trend Rallies are powerful oversold rallies that have low probabilities of success for reasons we will discuss below. These trades are typically short lived and can be very dangerous if you remain in the trade for too long. But you don’t want to be short if one occurs! Important to note, counter trend rallies go against our investment methodology of apply relative strength momentum / trend following and only sophisticated investors should apply such techniques.
Two reasons a counter trend rally occurs and fail:
a.) the trend strength is weak and investors don’t trust the initial phase (rebound). So as we say the confirmation is not great.
b.) the obvious reason for failure and short lived rebound is there is a lot of overhead supply = large resistance levels.
How to locate a counter trend rally?
Here is one example Chevron (CVX) breached the 30 reading on RSI and continued lower until an 11 reading. Now, I don’t care what the reading is so as long as it breached 30 and continued lower and saw a consecutive reversal for an increase. Next, I want to see the ATR Trailing Buy or aka Volatility Trailing stop triggered a buy for greater confirmation on a Renko chart. Once the Volatility stop kicks in these type of reversals, you must exit.
