Hello everybody and welcome to Zip Trader today! We're going to be talking about two different steps that you could use to spot a reversal. They're two ways that I'm going to be giving you are the most effective and I'm going to be breaking them down. As always in a short sweet and simplified way, all I ask of you is that you hit that like button and also subscribe for more short sweet and simplified videos on how to trade stock market. So the first way to know when a stock is heading for a reversal is to check the SMA lines.

Um, this is the simple moving average and it measures the average of the stock price over a specific time period which is the time period that you have open and your thinkorswim platform or whatever platform that you're using. I recommend Thinkorswim by the way the estimator and give you a more accurate idea of where the stock price would be if it wasn't for the volatility, right? So it's important because if we see a break above the SML line, that is a strong sign of an upward reversal. Okay, so if you look at a CST which by the way I found using my automatic watch list, check TV video link in the description if you'd like to learn how to set one up yourself. but it basically tracked stocks that are being overbought and oversold.

So getting back to the topic at hand, if you look at a CST we see a huge gap up. but take a look at what happened before each gap up. So if you look at the time period of a couple weeks before this huge reversal started, we started to see higher and higher trends above the SMA line and then a dip and then all of a sudden it broke and gapped up. Now the next reversal had a very similar trend.

We started seeing the price struggle to consistently break above Desam A line, but it was still making higher highs and then all of a sudden it started breaking out a gapping up. So the key here was that there was a growing amount of real estate between the SMA line and the price action. Now this real estate is important because the higher above the SMA line it is the higher it is from the average price and ever-increasing distance between the SMA line is a sign of an upward reversal. Like why stocks trending lower and lower and then going under the SMA line is a sign of a downward reversal.

To go over this in context of a CST. one more time after the gap up here we see the stock price edged closer and closer to the SMA line before crossing under it. Following this was a downward reversal. This is in contrast to before the reversal where we saw the price start by consistently pushing higher above the SMA line and then closing down slowly slowly closing in the gap of real estate between the current price action and the SMA line.

Now if you were holding during the gap up and you began to see the stock price edge closer and closer to the SMA one and then crossed underneath it, that would be a solid sign that there was an impending reversal and it would be time to take your profits and run. Let's go ahead and look at this in context of a larger cap stock with less volatility. So if we're looking at Apple AAPL and we put aside the fundamental news with their decreasing iPhone iPhone revenue aside for just a second, we can see this sell-off for the last few months with the price action struggling to close the downward gap between itself and the SMA. Um, then all of a sudden we start to see a gap up closer to the SMA and it even broke over it a few times, but still overall placed under the SMA line and today we saw it break the line once more.

Now, this is a long-term sign since this is a long-term chart that we might continue to see efforts of the day reversal, but this is not yet convincing enough for me. Blow up the chart and you check out the last five days and we could see this consistent break above the SMA line with one really major dip below it. Now, this might remind you of support and resistance and that is rightfully so. The SMA line can often serve as support when the stock consistently bounces on top of it.

Now knowing this, you can buy in when the stock nears the SMA line and then sell out at resistance. But because we are looking for a sustained reversal, this gives us a better idea when the price dips to the SMA line, but doesn't break below that we are seeing price strength that may continue to signal a reversal. Okay, so I want to give one more example just in case the other two haven't yet been hammered in of. So, CGC is more in line with the stocks that I prefer to trade because it's a smaller cap, but it tends to be more volatile, so let's use that example.

Okay, so now look at the original few mini run ups. We see a higher and higher consistent break above the SMA line and about three periods where we see this consistent upward trend. But then we see a sell-off for a while. Then we see a dip under the SMA line and a huge gap up.

Now, you can't use this method to predict this over this original gap up. This was largely due to be overall marijuana rally in August and September of last year, but what I want you to do is focus on how the stock price gapped up. It had built a pretty solid amount of real estate between itself and the SMA line, and then all of a sudden it started closing in. It bounced off the SMA line here and showed that SMA has new support and then was continuing to make higher highs.

Now this is where it gets interesting once we see it break down. Once we saw it break down past the SMA line, we were starting to see early signs of a reversal. Now, the share price did recover from this mini intra week breakdown, but it stopped continuing to gap up like it had done before over here. Eventually we saw the price make one last high and then gap down past the SMA line.

So what I'm getting at here is that a dip below the SMA line is a sign of a downward reversal and a consistent break above. Then this is really what we're trying to focus on. A consistent break above the SMA With ever growing real estate. that's the sign of a upward reversal.

So if a stock is trending downwards and you start to see some of these symptoms, then that could be a sign of an upward reversal. The next step or a way to find a reversal is to find a stock that is being oversold or discounted. now. I'm probably beating a dead horse with this one because I literally talk about it all the time.

But it's really one of the best ways to know if a stock is heading for a reversal is if it's consistently being marked as oversold on the RSI. So if you are unfamiliar with the RSI, a quick recap: If the price is over the top yellow line, it's overbought. and if it's below the bottom yellow line, its oversold. There's more to it, but that's all you really need to know for this video.

So if you want to learn more I Put the link to my crash course or a side video in the description below, so check that out if you're still interested. But I'm not super necessary for this video, but applying this in the same context as CGC we see several time periods when we could have bought in when the share prices marked as oversold on the RSI. The reason this is a solid sign of a reversal is because the Horas is basically calculated the chance that a stock is priced too low by using the relative price action during that specific time period. So if it is marked as oversold, that means that the probability is in your favor and that stock price is indeed oversold.

If it's oversold, then it's much more likely to be heading for an upward reversal than a stock that is not oversold. So let's check out the chart for Tesla for example, which is one of my favor positions by the way, because it goes up and down rather consistently and we see this constant bouncing back and forth from support and resistance. But most importantly, and back to the main topic in hand, we see this consistent over selling of share price marked by the RSI which continually signals a reversal. Okay, so in the last six months, we saw 16 dips below the six-month oversold line and each time if you had bought shares, you would have made money Subsequently, on the more prominent RSI did she would have made like upwards of $50 a share in profit.

Okay, so what am I getting at here? I'm getting at the fact that once a stock becomes oversold on the RSI, there's a heavy chance that it's about to be due for a reversal because it's being so oversold relative to its previous price strength. and with Tesla we see it every single time. If you look every single time, if you had purchased, you would have made money. Also, if you want to increase your odds of success.

Further, with this, you could also employ your knowledge of the SMA where I cover them the first step. Once you've taken a position, you could say to yourself, oh, this stock is getting closer and closer to the SMA line. This could be a sign of a downward reversal and now I should. And now is the perfect time for me to leave my position.

But the best way to deal with this is to sell when the stock is overbought. Either way, though, if you had bought in at a dip on Tesla, any time when it was oversold in this six-month chart and then held until the RSI have been marked as overbought, then you would have made money. Also, there's many more than 16 opportunities to buy in with when the RSI is oversold. If you actually blow up the intro week and intraday charts, you can see more and more opportunities.

But if you want to learn more about specifically how to find oversold stocks, go ahead and check out my RSI video as well as My Day Trading 101 video, both latest of which are in the description below. And last but not least, if you have any questions comment below: I Answer every single question usually within 24 hours, sometimes within 48. but I always answer questions and often I'll even answer just regular thank-you comments or whatever. so do not be afraid to hit the comment section below.

I Really like hearing from you guys! Um, also you can reach out to me on the Zipp trader Facebook group with the link in the description below. Anyways, I Hope you enjoyed this video for more short sweet and simplified videos on how to trade the stock market. Go ahead and hit that subscribe button and we'll see you in the next one.