One Day reversal is the starting point for most reversal patterns. After an extended rally the stock gaps higher at the open to trade at a new high on a positive news announcement. As the session proceeds volume expands significantly but by the close the entire rally disappears and the stock closes lower.
There are different names for the one-day reversal (ODR): Buying Climax / Selling Climax, Top-Reversal Day / Bottom-Reversal Day and upper reversal day / lower reversal day. The synonyms already indicate that ODRs occur either on a peak or on a ground.
• One day reversals occur because large investors choose to liquidate positions into strength so it is vital that volume accelerate as the stock begins to work lower.
• The stock must close on the day of the reversal at or very near the session lows.
One Day reversals occur because large investors need liquidity to close long positions. They understand that the best way to liquidate a large position is to sell into good news when liquidity is highest — so they are willing sellers on a day when the stock is making a new high and everyone is saying good things. Investors and media wonder how such good news could have resulted in such poor price performance.
Indeed, over the next several sessions analysts and traders rationalize that the selling was simply overdue given the strong rally leading into the news but every subsequent rally fails. Weeks later the stock is well off its recent highs.
Why One-Day Reversals Shape?
As already mentioned, significant reversal days have a considerable health span relative to past days of the last few weeks. Especially if you think of big price spikes, where intraday reversed the prices, the suspicion of a “stop running” is not far off. Stop-running means the following procedure: If a lower reversal day is used, make a series of stop-loss orders that were successively placed below the current price. There is no special course dynamics to the south to trigger the first stop. If the number of shares sold is large enough and the short sellers and the market makers assist the falling prices, then the price might fall further. In this scenario, the next stop could be triggered, and so on. The price plunges into the depths until the discouraged holders of long positions are finally thrown out of the market at high sales. The subsequent absence of sales pressure will lead to a vacuum in the market and the cascade sales will be stopped. This stop running (also known as “Gunning the Stops”) was deliberately created and fulfills its purpose: when it’s over and all market players who wanted to sell their shares have already sold so that an overwhelming buying demand can arise, the price will begin Recovery. And to the point where he started the day. In the final trading, a long thin line appears in a bar chart, which represents the described major course. The prices started about where they ended but in the meantime, the prices were a few points.
A) Price trend
First of all, there must be a prize. In many cases, an ODR occurs at the end of a long and steady price decline (or a corresponding price rise). In some cases, the past trend can be drawn into the chart over several months. Some ODRs, on the other hand, appear after price movements of only a few weeks. In this way they change their location from formation to formation. For top reversal days, the trend should be rising, falling for bottom-reversal days. Be sure to consider an upper reversal day in a falling market as not necessarily necessary one-day reversal for a trend change of the Intermediate Swing. Likewise, the likelihood of a reversal of the medium-term trend from a bottom-reversal day in a rising price is rather low. Although these temporary spikes can act as consolidations, it is most useful to select the ODRs after trend changes.
B) Closing price
Another identification guideline provides for consideration of where prices close. For top-reversal days, the closing rate should be at or near the day-time. Bottom-reversal days have exactly the opposite constellation: the closing price should be close to the day. The closing price close to or at the end of the range suggests that prices are likely to continue to move in the new direction. As already mentioned above, for example, lower reversal days, according to a generally accepted definition, are above the closing price of the previous day. However, whether this definition increases the significance and profitability of ODRs may be justified. For example, in the case of the lower reversal day, very often, closing prices above the closing price of the previous day prove to be a relatively bad signal generator for possible trend reversals. The condition thus turns out to be weak. In my opinion, you should tend to define a lower reversing day as a day that reaches a new low on a downward motion, then rotates, and closes above the previous day’s high. This constellation has proved to me in most cases as the more validere formation. Try to make your own image by looking at ODRs in their charts under the described aspect. If you wish, you can, of course, define the conditions even more strictly, for example, by having to surpass the high two days ago. This stricter definition, however, reduces the number of false signals, even more so as to suppress signals that are valid afterwards. However, the market dynamics of different markets can also be decisive. That is why I would like to ask you to conduct investigations and draw conclusions for their trading style in the markets you are trading.
Usually, an ODR, whether it is a Bottom-Reversal Day or a Top-Reversal Day, is accompanied by high volume. This “high” volume should be higher than the volume of the previous day, even better: higher than the volume of the last weeks or even months, since then of course the significance of the reversal formation increases. Another observation: the volume appears to be higher on soils than on peaks. This evidence supports the view that rising prices need a push while falling prices can fall due to their own weight.
D) Price range
As described, ODRs form relatively large price ranges. Partially, these spikes (more than) are twice the average spike size of past weeks and months. In these cases the pattern is of course very significant. But where does the significance generally begin and where does it end? Unfortunately, this can not be described uniformly for all markets and market phases. For this reason, you should also review this more generalized “policy” on the markets traded by you and relativize it for your own purposes. Perhaps you realize that other “guidelines” are valid or that other spike size divisions are more meaningful. For swing traders, for example, it can be helpful to set the trading margin of the ODR in relation to the profit margins of the last 4 or 7 trading days. If the ODR’s price range exceeds that of the last 4 or 7 trading days, then a “WR4” (Widest Range bar of last 4 bars) or WR7 is available, which can be a valuable indication for you. In a similar sense, Outside Reversal Days (course bars, which cover the price range of the previous day, see Figure 3) are also not a prerequisite for a reversal date, but they increase their significance.
E) Course dynamics
In a one-day reversal top, the prices are starting strongly from the beginning of trading. Often, the opening prices are already well above (or below) the closing price of the previous day, so that a large gap appears on the chart. Before the price upturn or the decline in prices comes to a standstill, the prices usually go up or down in the first third of trading, which would otherwise have been possible only in two, three or four trading days. But finally they come to a halt. This holding can take place both within the first trading hour and only at a later date. Quotations appear on the spot. Their fluctuation range decreases. Suddenly, the trend started at the beginning of trading. The courses are moving at as high a pace as before, but now in the opposite direction. Gen trade conclusion will generate larger sales. The prices rise (or sink), interrupted by only short pullbacks, nearly unstoppable. The course dynamics are so powerful that the courses after their initial long journey in the opposite direction to the end above the opening price. Although the turnover of ORDs is very high, as already mentioned, it is very often the case that the net price change is rather low compared to the previous day at the end of trading.
Bottom-Reversal Days especially in the indices
Top-Reversal Days appear under certain conditions quite frequently in the charts marktenger shares. This means values in which only relatively few free stocks allowed a rapid price upturn and attract the attention of many market participants. However, top-down reversal days in the indices are less frequent. Bottom-reversal days, on the other hand, are particularly striking in the indices at the end of a panic-like price decline.
One-Day Reversals and Major Trend
ODRs say nothing about the development of Major Trend. For the sake of security, the ODRs should be given greater evidence in the context of a minor trend. It is often the case that the reverse trend lasts for a few days in a zone, and partly also a kind of formation, before the courses are removed from the zone in an intermediate swing, a medium-term trend.
One-day reversals and formations
ODRs are often found inside or at the beginning of a technical formation offering a greater trading opportunity. In these cases, ODRs provide an important indication of likely trends in the trend. In any case, the ODR should be understood as a request to examine and monitor this chart particularly carefully. For the formation, which may develop, may signify a greater movement. You should be prepared for that.
It should also be noted that a False Move (see earlier Lesson à “Missing Signals”) or a shake-out movement at the top of a Symmetrical Triangle often takes the form of a one-day reversal.
But even at the beginning of a Symmetrical Triangle an ODR may occur, namely on the first peaks. This can also be the case if the triangle only consolidates a previous Uptrend and does not reverse it. Nevertheless, it also warns you of a short-term exhaustion of the buoyancy forces.
An ODR can appear exactly on the top of a long course upwind on the highest peak of a head-shoulder formation, followed by a protracted decline. However, it should be borne in mind that the reason for such a long price decline is not to be found in the ODR because the ODR only signaled the trend reversal within the head itself.
Downwards, a one-day reversal often appears in an enlarged and conspicuous form at the end of a panic. It is often referred to as “Climax-Day” or “Selling Climax” (see also earlier Lesson à “Principles of Volume Interpretation”). This phenomenon will be discussed in more detail below.
The Selling Climax
The Selling Climax (panic-style selling point) represents a cancellation of the offer overhang. Such price drops are typically triggered by bad news. Weak and uninformed market participants are provoked to sell at any price. If then the price was once sufficiently crushed, buyers enter the market who are better informed and are able to look forward. They collect the remaining offer and the prices turn up again.
Selling climaxes either represent a ground or there follows a rally with a subsequent movement to a new low. In both cases, however, the soil marked with the Selling Climax keeps a longer period. How long this “longer period” is depends on the
Time span of the chart. Of course, the Selling Climax in an intraday chart will never be as strong as the Selling Climax in one month.
In former times you could buy stocks with a deposit of only 10% of their value, and there were only meager restrictions for short sales. Professional speculators have been able to organize so-called “bear raids” (Baissiers’ bouts) (and they want to do so often).
These actions had the aim to shake out overly-indebted depots (“shake-out”), which means to bring to the forced sale. If the “audience” had bought too much credit, they were looking for a favorable moment and sold large shares short (“short selling”). In doing so, they brought the courses to collapse. The brokers demanded additional margins from the affected customers via “margin call”. Many customers wanted or could but no money after-shoot. This meant that their shares were compulsorily liquidated, which also pushed the market into the market. This in turn led to further price declines. The speculators in question were then able to take action, buy their short sales with a profit, and buy up additional shares for the recovery.
Bear-Raids of this kind were relatively effectively prevented by the establishment of the SEC and its regulations. But margin calls and foreclosures will, of course, continue to exist as long as stocks can be bought on credit. And they will always come into play as soon as the courses suffer extensive declines after a strong participation of the audience.
Keep in mind that most, if not all cases of a real selling climax are caused by emergency sales. And indeed as they were just described. They come at the end of a rapid and broad price downturn, which overstretches the reserves of many market players and forces them to sell their shares on the stock exchange at any price. This process is progressing, so to speak, so to speak. Each wave of forced sales brings new margin accounts to a standstill, until the end of the process, so many stocks are thrown overboard to make the final “washout”. This is the selling climax, in which the total turnover can exceed every day’s turnover from the previous upturn. It is the harvest season for those who have not been infected at the top by optimism and have capital in reserve to buy stocks at panic prices.
As you can see, such a “clean-out day” or a selling climax completely reverses the technical situation of the exchange. In this development, the shares have gone into very low rates from weak hands into strong.
A selling climax does not have to end within a single day and the reversal comes to an end. A one-day reversal can also extend in a special form for 2 days. In these cases, the downturn is only exhausted on the first day. Too late to allow for an extended recovery. As a rule, therefore, on the second day of trading, there is a strong rally. It has become clear that no further sales pressure on the stock market.
Basically, I can not advise to use ODRs as the sole indication for trading decisions. Rather, the identification of ODRs should serve either as a guide for existing positions or as additional information in a technical context, which can be used for opening a position. Please remember that a one-day reversal is not a reliable indicator of the primary trend. Also, a Selling Climax does not normally appear on the final floor of a bear market. Optimize the indication of ODRs by, for example, increasing the explained condition for the closing price and / or using WR7 and WR4 patterns.
Author: Frank Thönnissen