Stock Price Reversal Pattern

Price Reversal Pattern

The One-Day Stock Price Reversal Pattern

By Dr. Winton Felt

A one-day stock price reversal occurs when a new high is established in an up-trend followed by a close that is lower than that of the previous day.  The greater the range for the day, the heavier the volume, and the greater the decline of the close below the previous close, the greater the significance of the signal.  The pattern might be seen as a clue to the coming trend change..

The day on which a one-day reversal occurs is usually a high volume day.  In fact, the volume usually exceeds the volume of any other day during the previous few months.  A One-day stock reversal pattern may occur at the peak of a prolonged advance in which volume has gradually increased.  However, it may also occur at the first peak of a symmetrical triangle or other consolidation pattern.  In other words, it can occur when the stock is about to reverse its trend or when it is only going to reverse a short distance as it consolidates in preparation for another up-move. 

Generally the pullback leg of this formation is not of major proportions but it can be the beginning of a move that will end up having major proportions.  The last upward surge is caused by the last of the potential buyers taking the plunge because they are afraid the stock is getting away from them.  They have seen the stock climb higher and higher and they have not participated.  Since these buyers are the last of the holdouts, there are no more buyers left.  Therefore, this last surge actually marks at least a temporary end of the buying pressure that has been pushing the stock to higher price levels. 

The traders at and other experienced traders are alert to the signs of buying exhaustion.  In this case they would see that volume had dramatically increased with the surge in price.  They know what that means, so they begin to sell while the buying is at a peak.  Eventually, there are few buyers left and the buying pressure decreases.  Then the selling pressure begins to take control of the stock’s price action.  By the end of the day, the stock is below the low of the previous day.  After the close, other traders who are still in the stock who did not see the intra-day activity now see that a reversal pattern has formed.  They sell on the following day and still other traders join the selling as short-sellers.  

A selling climax is simply the opposite of the above pattern.  It usually consists of a dramatic turnaround at the bottom of an extended decline in the stock.  Stock holders have been seeing the value of their positions continue to decline.  At some point, the disgruntled, nervous and discouraged longs bail out (volume surges).  The stock plunges.  However, traders have been watching the long decline in the stock’s price and have been waiting for climactic selling activity.  When they see it, they and value investors see the stock as attractive and take their positions (even more volume for the day).  These new buyers are not discouraged.  They bought because they are hopeful.  They are far more stable and less likely to sell.  They therefore give the stock a good foundation or base.  As the number of sellers dwindle, the new buyers begin to dominate the price action of the stock.  The stock closes above the previous day’s close.  The following day still other traders see the reversal pattern and buy.  The stock reverses its direction.