Reversal Days

Reversal signals may be formed by a single bar relative to the preceding bar. The signals vary greatly in strength: weak signals may only signal a peak or trough in the short cycle while extreme signals may indicate a change in the primary trend.

Signal Strength

There are 4 major factors that affect signal strength:

1. Reversal signals are most reliable if they occur after a strong trend:
              a strong trend = a strong reversal signal.
   If the trend is weak, so is the signal.
2. Days that spike.
3. Wide-ranging days - days with a very wide range.
4. Unusually high volumes.
5. Signal patterns:
   • Open-Close reversals are powerful signals;
   • Closing Price reversals are very strong;
   • Hook reversals are weaker, formed on an inside day;
   • Key reversals do not occur often but are potent signals;
   • Pivot Point reversals and Complex Pivot Points are the most common signals;
   • Island reversals and Island Clusters are powerful signals, formed with gaps.

Other reversal and continuation patterns are identified under gaps and candlesticks.

Example

Charles Schwab with 150-day moving average and 20-day volume exponential moving average.

The Key Reversal at [K] comes after a strong up-trend and exceptionally high volume activity [V]. Price gaps up, opening above the High of the previous day, then falls sharply to make a key reversal on a wide-ranging day.

The reversal signals a change in the primary trend. Compare this to earlier, weaker reversal signals that merely signaled a change in the short cycle.