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A series of top and
bottom reversals are also shown for your observation. Notice, in each
case, how a temporary reaction against the main trend was ended when we
had the “flush-out” day with prices selling off drastically, then
recovering, to close up for the day. A reversal day is even more significant the longer the correction has been in effect.
MY NEW REVERSAL DAY DISCOVERY
Our second form of reversal day, and one I’ll bet you’ve never even heard about, starts with prices heading sharply lower and closing, sharply lower prices might end up limit down, or just “off sharply” but, in any event, prices take a beating and are down handsomely for the day [C].
» When prices should go lower, but don't, buy ! «
The trend reversal is indicated the next morning when prices open a good deal higher than the previous day's close. Such unusual strength is indicative of a key reversal for the market. What happens, in essence, is that prices fail to follow through with the previous day's slide. This type of action is most unusual since lower prices forecast lower openings about 85% of the time. Lower prices, with substantially higher openings, are a “sure thing” that a new move has begun.
It is particularly significant if prices close down the limit, and the next day open slightly up. Limit moves should beget more limit moves. A reversal of this pattern points to a market opportunity.
A special point of interest here is that an extremely strong signal is generated any time you have two reversal days with the second one higher, for a buy, lower for a sale. This is an unusual display of strength. I cannot recall when such a signal did not produce profits.
"New Reversal Days" in the NQ — April-May 2024 (daily bars)