My “New Reversal Day” Discovery | Larry Williams

The most common reversal day is simply one where prices sell off substantially, almost always down limit, only to reverse and close up for the day. Such a day appears in the following diagram [A + B].

 

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.

Quoted from:
Larry Williams (1979) - How I Made One Million Dollars Last Year Trading Commodities.

 

 

 "New Reversal Days" in the NQ — April-May 2024 (daily bars)

Trend Reversal Entry Strategies

Trend-Reversal Entry Strategies aim to buy at or near the bottom and to sell at or near the top. Advisors and educators often reject these strategies because their technical analysis relies on lagging indicators. However, there are three high probability two-bar reversal patterns: the Reversal Day, the Signal Day and the Snap-Back Reversal Day. These are low-risk trend-reversal entry strategies for short-term trading and swing-trading. The set-ups are identified on the daily chart and the entries executed on the hourly chart or lower timeframes. The profit/loss ration needs to be 1.5 or more. Proper knowledge of market structure and price action is required.

 

How reliable are these 'text book' patterns?
Brent Penfold (2017) - Reversal Patterns.
Oddmund Groette (2023) - Reversal Day Strategy Backtest – Does It Work?

Reversal Day Trade Entry Set-Up

A Reversal Day top forms when price makes a new daily high but the day closes below the prior day's close. The current day's open and the trend to new highs is not sustained by the close. Variations of the Reversal Day are the Key Reversal Day, the Outside Reversal Day and the Outside Key Reversal Day.

 

 

On a Key Reversal Day the market opens below the prior day's close, makes a new high, but closes below the prior day's close and the current day's open. A Key Reversal Day is a stronger reversal signal than a Reversal Day. Outside Reversal Days and Key Reversal Days are both Outside Days and meet the criteria of the Reversal Day. Outside Reversal Days are stronger reversal indicators than Reversal Days, and Outside Key Reversal Days are even more convincing that a daily reversal has taken place. In all cases the Initial Protective Stop Loss is one tick above the high.

Signal Day Trade Entry Set-Up

A Signal Day opens above the prior day's close, makes a new high and the close is below the current day's open. The open must be in the top 1/3 of the daily range and the close must be in the bottom 1/3 to qualify as a valid Signal Day. Unlike a Reversal Day, the Signal Day's close does not have to be below the prior day's close, only below the current day's open.

The Gap Signal Day is a very strong daily reversal indicator. The entire daily range of the Gap Signal Day is above the prior day's range, leaving a gap at the end of the day. Considering the positive up close as bullish is a misleading view of a Gap Signal Day.

 

In both cases the Initial Protective Stop Loss is one tick above the high of the Signal Day.

Snap-Back Reversal Day Trade Entry Set-Up

This is a two-day reversal setup. On Day One the market makes a new high with an open in the lower 1/3 of the daily range and the high in the lop 1/3. It appears to be a very bullish day. Day Two is the Snap-Back Day with the open in the top 1/3 of the daily range and the close in the bottom 1/3. Day Two does not have to reach new highs or lows compared to Day One. The wider the range of Day One and Day Two, the stronger the indication for a reversal. A stronger Snap-Back Reversal Day has Day Two's open below Day One's close with a new daily low and a close below the prior day's low. 

The Initial Protective Stop Loss is one tick above the higher of the two days.

 

All of the above daily reversal patterns frequently occur within a trend without resulting in a sustained change of trend. Hence daily reversal set-ups are only to be considered valid when time, price and patterns are indicating a termination of the trend. 

Reference:
Robert C. Miner (2002/2022) - Dynamic Trading.

Dynamic Concepts in Time, Price & Pattern Analysis with Practical Strategies for Traders & Investors.

Brent Penfold (2017) - Reversal Patterns.

 Oddmund Groette (2023) - Reversal Day Strategy Backtest – Does It Work?

Oddmund Groette (2023) - 200+ Quantified S&P 500 Trading Strategies.