Attack the Week (ATW)
Trend Exhaustion & Reversals / Calendar / Chart Setups / Asset Allocation Model
Sunday Thoughts
Trends, Exhaustion, and the Edge at the Turning Point
There is something deeply comforting about a strong trend. It gives the illusion of clarity in an otherwise chaotic world. An equity index grinding higher appears to validate growth and innovation. A currency trending lower feels like policy divergence playing out cleanly. In the middle of a persistent move, doubt fades and narratives solidify. We tell ourselves that the market has “found its direction.” But markets are not linear systems. They are feedback systems. And feedback systems do not transition smoothly from strength to weakness. They move from stability to instability, and from instability to reversal. As a Mandalorian would say: “This is the way”.
At the heart of any trend lies feedback or reflexivity. A rising price attracts buyers, which pushes the price higher, which attracts more buyers. The loop feeds on itself. In quantitative terms, this persistence can be captured by the Hurst exponent, a measure of how strongly a time series tends to trend or mean-revert. When the Hurst reading is above 0.5, price movements exhibit persistence; trends are more likely to continue than reverse. When it is below 0.5, mean reversion dominates, and moves tend to fade. Around 0.5, markets behave more like a random process. But what becomes interesting is not simply whether persistence exists. It is when persistence becomes extreme across multiple time scales simultaneously. When short-term, medium-term, and longer-term measures all show strong trend behaviour, what we are observing is not just momentum. We are observing crowd agreement.
Crowd agreement is powerful but fragile. When everyone who wants to participate has already participated, the marginal buyer disappears. At that point, the trend is not sustained by fresh capital or new information, but by inertia. Research grounded in non-linear dynamics and fractal market theory suggests that markets approaching such states exhibit identifiable characteristics: accelerating price movement, tightening oscillations, and what is sometimes described as self-organised criticality. In physical systems, this is the moment before a sandpile collapses or a fault line shifts. In markets, it is the moment before a regime change.
The framework often distinguishes between two conditions. The first is an “extension,” where trend persistence becomes extreme, and price accelerates in a near-parabolic fashion. These are the final stages of manias or capitulation moves, where enthusiasm or panic reaches saturation. The second is a “compression,” where markets exhibit extreme mean reversion and volatility contracts tightly across scales. In this state, price appears directionless, but potential energy builds beneath the surface. When it releases, it does so forcefully, initiating a new trend. Both states represent instability. One is overextension; the other is coiled tension. In both cases, the market is near a turning point.
What matters for us as macro investors is not simply identifying trends, but identifying when trends are likely to exhaust. The best risk-reward rarely sits in the middle of a mature move. By that stage, positioning is crowded, narratives are entrenched, and asymmetry has diminished. Upside is limited relative to downside. Volatility often rises subtly as internal disagreements emerge beneath the surface. It is at the edges of these moves, when persistence becomes extreme and structural instability increases, that asymmetry improves dramatically. Turning points offer defined risk and expanding opportunity because the consensus that supported the previous move is already fully expressed in price.
PA - Global Macro’s own reversal framework is built around similar concepts, even if we do not always describe them explicitly in terms of the Hurst exponent or discrete scale invariance. We focus on multi-scale trend alignment, on curvature in price behaviour, on the saturation of positioning, and on regime transitions. We look for conditions in which the probability of continuation is no longer higher than that of reversal. We seek moments when convexity begins to shift in our favour. In other words, we aim to identify likely turning points, as this is where the most effective risk units can be deployed.
This does not mean fighting every trend or attempting to pick every top and bottom. It means understanding that trends mature. They build through feedback, they accelerate as participation broadens, and they eventually exhaust when marginal flows fade. When persistence becomes extreme across scales, stability is reduced rather than increased. The market appears strongest precisely when it is most fragile.
In a world increasingly shaped by reflexivity, flows, and algorithmic reinforcement, these dynamics matter more than ever. Trends will continue to form, and we will continue to respect them. But our edge does not lie in chasing the middle of the move. It lies in recognising when the structure beneath the trend has become unstable, when persistence has turned into overconfidence, and when the risk-reward begins to favour transition rather than continuation.
Every trend contains within it the seeds of its own reversal. Our job is not to predict the future with certainty. It is the position where asymmetry is greatest. And more often than not, that asymmetry sits at exhaustion points — where stability gives way to fragility, and fragility gives way to opportunity.
A number of equity indices and select sectors are beginning to exhibit characteristics consistent with this kind of structural extension. Multi-timeframe trends remain firmly intact, but momentum is stretched, price acceleration has steepened, and dispersion beneath the surface is quietly increasing. None of this guarantees an imminent reversal—trends can persist longer than expected—but the combination raises the probability that we are moving toward an exhaustion phase rather than the early innings of a fresh cycle.
What’s inside this week’s note
Behind the paywall: Macro D discusses the Fed’s likely next move after last week’s data. Remember to check out his latest Macro FX trade corner publication.
After that, we do what we always do:
The weekly calendar (where the market might be vulnerable vs. where it might be numb),
A scan of a few chart setups that look technically interesting,
We close with the output of the weekly asset allocation model.
Enjoy!
