Monday, November 15, 2010

Key Reversal Day

Last week we had negative technical key reversals on several “important” indices, the Nasdaq Composite, the Russell 2000 and the TSX Composite. A Key Reversal is 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. The reversal can be inside the prior day range or outside (engulfing) the prior day’s range. Either way we are supposed to treat these one day events as significant turning points.

I have back-tested key reversals on daily charts and found them to be for the most part one or two day interruptions of the current trend – be it up or down. Investors are far better served by using weekly or monthly charts to identify the real trend. Our chart to-day is the monthly bar of the NASDAQ Composite spanning about 10-years. This chart is loaded with bullish technical signals. The NASDAQ has just broken up and out of an inverse Head & Shoulders bullish reversal pattern, the price is above a rising 12-month moving average, the 5/15/3 MOM is positive and the relative perform vs. the Dow Industrials is clearly established outperform. So the lesson here is to treat daily charts for what they are – no cosmic effect.

1 comment:

Shawn Severin said...

Hi Bill. I was thinking exactly the same thing. The entire investor community, market timers and technical analysts in particular, are eagerly anticipating a "short term correction" in order to get fully exposed to equities again. As more investors anticipate a correction, the likelihood of it occurring continues to decline. I find it interesting that the CDN dollar is not leading the way down during this "correction". It remains stable near parity, unlike the previous few corrections during this bull run. If there is a correction at all, I'm anticipating an EXTREMELY shallow one (i.e. <5%).