Key Reversal

This formation is well known but often incorrectly read. Key reversals are outside days either at contract highs or lows. A key reversal down occurs when a market makes a new contract high, then reverses down takes out the previous day's low, and closes lower than the previous day's close. A key reversal up occurs when a market makes a new contract low, then reverses up and takes out the previous day's high, and also closes above the previous day's close. Many traders feel that when a key reversal occurs, it signals the end of the move, and the beginning of a new one. They will use this signal in an attempt to top pick or bottom pick the market. They will enter the market and place stops above or below the key reversal, depending on if it is a key reversal down or up, respectively. Figure 10 shows a key reversal in the March '00 S & P 500. With a sweeping outside day lower after making contract highs, the market broke sharply, made an attempt to retrace into the trough and then continued lower.