The Key Reversal Pattern

StockCharts.com defines a Key Reversal pattern as a pattern where prices sharply reverse during a trend. In an uptrend, prices open in new highs and then close below the previous day's closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.

I want to thank my friend Lee for pointing out to me the recent key reversal pattern that has shown up in so much of the market. This pattern can be seen simply by looking at price alone and requires no other indicator. The pattern can show up in different time frames and is one of the best patterns traders can use for a timing signal of when to get into or out of a market. A few examples will help here. The following charts are of a weekly time frame.

My favorite market to watch is the S&P 500 and I will start here. In a sense it represents the entire economy. The following chart shows that the far right candle, which reflects the weekly price range (actually 4 days this week), went below last weeks low and above last weeks high. This is called an Outside Key Reversal and is a very powerful signal. Also, note that the market closed at the very line I have talked about before at that 1330 area. I have called this the line in the sand. If the monthly close is above this line it is likely we will see further increases in the market and a rally. Click chart to enlarge.

This next chart is of the Dow Jones Industrial Average Index. It also shows a very bullish pattern just by looking at the most recent candles. The DJIA is higher now than when the market opened this month and has a good chance to close up for the month.

The Russell 2000 Index is a measure of 2000 small cap companies and also a riskier market than the previous two charts above which reflect the large cap market. If a risky market is going up then that means investors feel confidence to invest in riskier assets which is very bullish for the market as a whole. Here we see the week before last was a doji pattern and last week was again very bullish.

The Nasdaq really reflects the broader market in that it contains some 5000 companies and is heavily weighted in technology companies. The chart of the Nasdaq looks similar to the Russell 2000 in that the week before last shows a doji pattern with a bullish candle for last weeks price action.

I want to include a chart of GLD which tracks the price of gold by approximately 1/10th. Gold has seen a dynamic run up but here again we see an Outside Key Reversal pattern, except this time it is to the downside. In this instance, prices went above last weeks high and closed below last weeks low. In fact, prices closed below not only last week but the past 4 weeks lows. It would appear that the gold bubble has burst. Money that went in to gold as a safe haven has come out. But where did it go?

In a previous article I mentioned in the Three Sector Hypothesis that our economy has moved from agricultural or resource based to industrial and manufacturing to a service sector economy. This is reflected in the fact that the financial sector, which is a large part of the service sector, has been hard hit by the housing crisis and seen share price drop considerably. If the market is at a bottom, it is because the financial sector is at a bottom. For a final chart let me show you what could be a very good long term investment. This is a very dynamic Outside Key Reversal chart of the financial sector. Thanks again goes to my friend Lee for pointing this chart out to me of the ETF of the financial sector. The symbol is IYF.
Finally, I want to include a Market Summary so we can follow the performance of the markets up to this point.