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What is a Trend Reversal?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 September 2016
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Trend reversals are changes in the direction of individual investments or a market as a whole. Sometimes known simply as a reversal, a trend reversal identifies a shift in investment activities that is anticipated to remain in place for an appreciable period of time. This shift may be a rally for a given stock, or a rally for a stock market as a whole. A trend reversal may not be a positive occurrence, as it can also mean a market or individual investment is entering a period of sustained downturn.

A trend reversal is normally identified by investors and financial professionals as they evaluate the current status of a marketplace. As part of the overall analysis, the reasons for the current status of the stock or the market are identified. If one of more of those reasons is shortly anticipated to cease being relevant, analysts will attempt to project the future performance of the market or stock. If all indications point to a change in the current trend of the stock or market under consideration, it is said that a trend reversal is projected.

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The trend reversal may be a positive or negative situation for the investor. If an investment or group of investments of the same type are currently flat or barely generating a return, a trend reversal that indicates a sudden upswing in value per unit is considered a positive trend reversal. Should investments that have performed well over the last year or so suddenly begin to decline in value, the condition is often referred to as a negative trend reversal.

Investors and brokers often attempt to identify the potential for trend reversal as one way of planning future investment strategies. For example, a broker may advise a client to sell off stocks or other securities in a given market if there are indications the market is about to undergo decline for a period of time. The funds realized from the sale of the securities can be invested in a different market that is considered to be stable and demonstrates a potential for growth. In this manner, the broker uses the identification of trend reversal to minimize loss to the client and possibly improve the opportunities to earn a greater return on the investment.

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