Wednesday, July 22, 2009

GT Blog July 21, 2009

Technical Analysis – myths and urban legends continued…

Today we look at the dreaded Key Reversal – yes the inexperienced analyst will often recommend a sale based on this over-used reversal pattern

According to “Key Reversal Day: A one day chart pattern where prices sharply reverse during a trend. In an uptrend, prices open in new highs and then close below the previous day's closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.

I have found that on daily charts – the key reversal is just noise and in most cases the trend is not interrupted – take a look at the daily chart of SNC – Lavalin Group Inc the 10 key reversals are marked with a red dot

The experienced technician will use other trend following tools such as trend lines and simple moving averages – more complex studies such as relative performance and money flow will also confirm the advance or decline

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