What has to change before a trend can turn?

You met the definition of a trend in Markets Foundations: an uptrend is a sequence of higher highs and higher lows. That definition does all the work here. A reversal isn't a mood or a feeling — it's the sequence breaking.

The two events that constitute a turn

For an uptrend to become something else, two things have to happen in order:

1. A rally fails to exceed the previous peak. For the first time in the sequence, the buyers can't get there.
2. The following decline cuts below the previous valley. The level that had been reliably defended is no longer defended.

Only after both have occurred has the pattern of higher highs and higher lows actually stopped. Either event alone is common and means very little on its own.

The behaviour behind it

Why would a trend end at all? Because the supply of new buyers is finite. A rising price works by continuously recruiting people willing to pay more than the last person did. Every recruit converts from potential buyer to existing holder — and existing holders are future supply. Late in a trend, most of the people who were ever going to be enthusiastic already own it, so the marginal buyer gets scarcer while the pool of potential sellers gets larger.

Reversal patterns — head and shoulders, double tops, rounding tops — are simply pictures of that handover, drawn over weeks. Each one shows demand thinning and supply arriving earlier than before. That's the whole content.

A worked example

Rounded and illustrative. A stock's rally peaks run $100, $108, $112 — textbook higher highs, with pullback lows at $95, $104. Then:

• A rally stalls at $110 (below the $112 peak). Event one.
• The next decline reaches $101, below the $104 low. Event two.

The sequence is broken. Describe it exactly that way: the higher-high, higher-low pattern ended in this window. Note what that sentence does not claim — that the price will fall, that a downtrend has begun, or that anything at all should be done about it.

The right-edge problem

Here is the difficulty that never goes away. At the moment the rally stalls at $110, you have one failed rally and an open question. Most failed rallies do not become reversals — in a healthy uptrend, plenty of rallies stall and then resume. You only know a reversal happened once both events are complete, which is to say after the change you'd have wanted to notice early.

Everything in this unit lives in that gap between "the shape is complete" and "the shape was useful." Hold on to the discomfort; it's the correct response.

Try it now

1. On the schematic above, count the bars between the marked failed rally and the marked broken low. That gap is the cost of confirmation, and it is paid every single time — there is no setting that removes it.
2. Now find the same two events where nobody labelled them. In the five years below, find a spot where a long uptrend ended, and mark the last higher high, the failed rally, and the low that broke the sequence.

3. Failure hunt: in the same chart's uptrend, find at least two rallies that stalled below the prior peak and then resumed higher anyway. How would you have told them apart from the real one at the time?