A Change of Character is not Tradeable

• Posted by Greg Harmon
• on January 27th, 2016

One concept in technical analysis that often misinterpreted is that of a change of character. This is meant to be an indication that what has been happening is now changing. The misinterpretation is that it is often thought that a change of character means a reversal. In fact that would be a premature assessment. And that is a very large misinterpretation because technical analysis is built on confirmation of change. So interpreting a change of character as a reversal is critical mistake.

The chart below of the recent price action in the SPDR S&P 500 ($SPY) can be helpful in explaining the distinction. The chart shows the activity going back to November. The SPY was in a channel drifting slowly downward until the end of the year. At that point it accelerated lower along the dotted trend line.

The change of character manifested itself at the end of last week. There are two things to note. First the RSI made a higher high. Second the MACD started back higher. The evidence of a change of character increased Tuesday. Another higher high in the RSI and a cross up in the MACD. Real positive divergence in momentum. The price has also stopped falling. These combine to create a change of character. They are positive points for the SPY, but they do not indicate a reversal higher. Price action could easily just move sideways from here for a while. Or the divergence could fade.

It would take a price confirmation of the divergence to signal a change to a reversal higher. This would happen by a move above the January 13 high price of 194.86. This would be higher high and a change of trend. That is a tradeable event.

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