Key reversals are a dime a dozen, on sale now! Key reversal is when the current bar has a higher high and lower low than the previous bar and the market closes higher or lower than the previous bar in a new direction. They happen on charts of every time period which immediately should suggest that there will be conflicts. Key reversals are a technical indicator and can be programmed as a quant indicator. Leave no doubt, the indicator does show strength or weakness on a particular chart time frame because of the sharp change in the relative power of the buyers and sellers. But the indicator only provides limited information about the time frame of a rally or selloff.
Key reversals can be reversed as early as the next bar, so the question then is whether they are consistent and reliable. Different folks have different success with key reversal indicators, so it is useless to say it is or is not a reliable indicator. Data tells all.
Let’s use CZ23 and start with the key reversal down on the weekly chart on 4/25/22, close at 696.00. The next key reversal up was on 7/10/23, close 506.50. Potential 89.50 cent hedge gain. In between, it hid a selloff from 696 down to 554, a rally up to 643, a selloff down to 492, a rally to 624, and a selloff down to 479. Before leaving the weekly chart, note that the key reversal up was possible because the week of 7/03/23 was relatively inactive. Nonetheless, the signal is that the market is likely to move higher. Major rally or minor correction? Based on another technical indicator, a correction to 524-555 followed by another selloff to 400 or lower looks more likely before new highs. (Opinion, not a recommendation)
Looking at the daily chart for CZ23, there was no key reversal down until 12/30/22 and no other key reversals through today (7/18/23). Dropping down to the hourly chart, there was a key reversal down on 1/30/23, reversal up on 1/31/23, reversal down on 2/2/23, reversal up on 2/3/23, etc.
In summary, key reversals do indicate a shift in relative strength between buyers and sellers but provide only limited information about the duration of that strength.
Posted by Keith D. Rogers on 18 July 2023
