REVERSAL DAYS
posted under
Philosophy of Technical Analysis
by ceecabolos
Another important building block is the reversal day. This particular chart formation goes by many names—the top reversal day,
the bottom reversal day, the buying or selling climax, and the key reversal day. By itself, this formation is not of major importance. But, taken in the context of other technical information, it can sometimes be significant. Let's first define what a reversal day is.
A reversal day takes place either at a top or a bottom. The generally accepted definition of a top reversal day is the setting of a new high in an uptrend, followed by a lower close on the same day. In other words, prices set a new high for a given upmove at some point during the day (usually at or near the opening) then weaken and actually close lower than the previous day's closing. A bottom reversal day would be a new low during the day followed by a higher close.
The wider the range for the day and the heavier the volume, the more significant is the signal for a possible near term
trend reversal. Figures 4.22a-b show what both would look like on a bar chart. Note the heavier volume on the reversal day. Also notice that both the high and low on the reversal day exceed the range of the previous day, forming an outside day. While an outside day is not a requirement for a reversal day, it does carry more significance. (See Figure 4.22c.)
The bottom reversal day is sometimes referred to as a selling climax. This is usually a dramatic turnaround at the bottom of a down move where all the discouraged longs have finally been forced out of the market on heavy volume. The subsequent absence of selling pressure creates a vacuum over the market, which prices quickly rally to fill. The selling climax is one of the more dramatic examples of the reversal day and, while it may not mark the final bottom of a falling market, it usually signals that a significant low has been seen.Weekly and Monthly Reversals
This type of reversal pattern shows up on weekly and monthly bar charts, and with much greater significance. On a weekly chart, each bar represents the entire week's range with the close registered on Friday. An upside weekly reversal, therefore, would occur when the market trades lower during the week, makes a new low for the move, but on Friday closes above the previous Friday's close.
Weekly reversals are much more significant than daily reversals for obvious reasons and are watched closely by chartists as signaling important turning points. By the same token, monthly reversals are even more important.
the bottom reversal day, the buying or selling climax, and the key reversal day. By itself, this formation is not of major importance. But, taken in the context of other technical information, it can sometimes be significant. Let's first define what a reversal day is.
A reversal day takes place either at a top or a bottom. The generally accepted definition of a top reversal day is the setting of a new high in an uptrend, followed by a lower close on the same day. In other words, prices set a new high for a given upmove at some point during the day (usually at or near the opening) then weaken and actually close lower than the previous day's closing. A bottom reversal day would be a new low during the day followed by a higher close.
The wider the range for the day and the heavier the volume, the more significant is the signal for a possible near term
trend reversal. Figures 4.22a-b show what both would look like on a bar chart. Note the heavier volume on the reversal day. Also notice that both the high and low on the reversal day exceed the range of the previous day, forming an outside day. While an outside day is not a requirement for a reversal day, it does carry more significance. (See Figure 4.22c.)
The bottom reversal day is sometimes referred to as a selling climax. This is usually a dramatic turnaround at the bottom of a down move where all the discouraged longs have finally been forced out of the market on heavy volume. The subsequent absence of selling pressure creates a vacuum over the market, which prices quickly rally to fill. The selling climax is one of the more dramatic examples of the reversal day and, while it may not mark the final bottom of a falling market, it usually signals that a significant low has been seen.Weekly and Monthly Reversals
This type of reversal pattern shows up on weekly and monthly bar charts, and with much greater significance. On a weekly chart, each bar represents the entire week's range with the close registered on Friday. An upside weekly reversal, therefore, would occur when the market trades lower during the week, makes a new low for the move, but on Friday closes above the previous Friday's close.
Weekly reversals are much more significant than daily reversals for obvious reasons and are watched closely by chartists as signaling important turning points. By the same token, monthly reversals are even more important.
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