Technical Analysis

Reversal Signals

Reversal signals are multi bar patterns that provide a reasonable indication that the short term trend is changing (or reversing).

You might be amazed how effective they can be. There are 6 of them and all have an opposite. In other words, each of the examples below show the short term up trend then changing (or reversing) into a short term down trend. Each of these patterns can be used to show the opposite change of direction.

The 6 patterns are:

  • island
  • open / close
  • pivot point
  • hook
  • closing price
  • key

They will each be shown in turn below.

Island

With an island gap (shown above), you observe 2 gaps in succession but in opposite directions. The larger the gap, the more significant the reversal. The first gap is normally in the direction of the prevailing trend.

Open/Close

This is a 2 bar pattern (shown above) where the highest day in the pattern has a higher high and higher low than previous day. The close for that higher day is higher than the previous close, however the open is near the top of the trading range and the close is near bottom of the trading range.

Pivot Point

This is a 3 bar pattern (shown above) where the central bar has a higher high than the highs of the days either side. The close of the 3rd bar is lower than the low of the day of with highest high.

Hook

This is a 2 bar pattern (shown above) where we see a lower high and higher low than the previous day. We also observe an open near the top of the trading range and a close near the bottom of the trading range. This pattern is known as an inside day and can also be referred to in candlestick parlance as a bearish harami.

Closing Price

This is a 2 bar pattern (shown above) where we observe a higher high and higher low than the previous day, and the close is lower than the previous close. In the 2nd bar, there is also an open near the top of the trading range and a close near the bottom of the trading range.

Key

This is a 2 bar pattern (shown above) where we observe a higher high and lower low than the previous day, and the open is near the top of the trading range and above the previous close. The close of the 2nd bar is near the bottom of the trading range and lower than the previous close. This pattern is known as an outside day and can also be referred to in candlestick parlance as a bearish engulfing pattern.