Turning points

A turning point is a point at which the price of an asset reverses direction. Turning points tend to occur at a fixed rhythm in time, such that every X days there is a turning point for that asset. However, whether the price will form a bottom or top is not known in advance, only the timing.

Turning Points around Us

Turning points can be seen in everyday life. One example is at school: every few weeks or months, students will have a test or an exam. The direction a student’s grade takes after the exam is not known, but the timing of the exams is. The student’s grade may improve after every single test, or it might decline after every test, or it might improve after some tests and worsen after others.

Turning Points in Trading

In terms of trading, turning point is a point at which the price of an asset reverses direction. Turning points tend to occur at a fixed rhythm in time, such that every X days there is a turning point for that asset. However, whether the price will form a bottom or top is not known in advance, only the timing.

So, if a turning point in gold is in 2 weeks, it doesn't tell us whether the price will top or bottom, because we have yet to see what kind of move will precede the turning point. If it is preceded by a rally, the implications will be bearish. Conversely, if gold's turning point is preceded by a decline, the implications will be bullish.

Unlike a cycle, which features a fixed sequence of tops and bottoms in a particular recurring order, in case of a series of turning points, there is no “guarantee” that the next turning point will be one or the other. All we know is that after a fixed period of time, the price will likely reverse direction. It may seem perplexing at the first sight, but the following examples should make everything clear.

Turning Points in Gold

Please take a look at the gold chart below for details.

We marked the turning points with black, vertical lines and as you can see, are seen approximately every 2 months. To be precise, the exact interval is a bit shorter than 2 months, but that's not important when it comes to explaining what a turning point is. 

What matters is that each turning point was accompanied (at least approximately) by some kind of price extreme in the price of the yellow metal. At times gold topped and at other times gold bottomed and there was no specific order for it. In almost all cases, however, the turning point simply reversed the most recent direction of the move. If gold had been declining, it would be likely to rally after the turning point. If gold was after a rally, it would be likely to top close to the turning point.

Turning Points in Silver

The chart below (courtesy of stockcharts.com) demonstrates a series of turning points in silver (the SLV ETF to be precise). The turning points occur close to tops and bottoms, not in any particular fixed order, but nevertheless at regular time intervals.

We can get an idea of the reversal direction from the price behavior immediately preceding the turning point: if the price is declining just before the turning point is scheduled to occur, then it will probably form a bottom; and if the price is rising, it will probably form a top. In other words, the above chart shows that turning points in silver work just like they do in case of gold.

Again, series of turning points might be all bottoms, or all tops, or any combination of bottoms and tops. We can see that all cycles are series of turning points, but not all series of turning points are cycles. The defining feature of turning points is that they occur at regular intervals over time. The period between turning points remains constant, even if the reversal direction does not. Speaking of intervals, please note that the one for silver was slightly shorter than the one for gold.

Turning Points in the USD Index

The precious metals market is not the only one, where we can spot turning points and take advantage of them. The above chart features the turning points in the USD Index and as you can see their efficiency is quite high. Interestingly, the interval that we see above is considerably shorter than the one in case of gold and silver, so its obvious that the turning points differ.