I believe Wednesday’s equity price action was very significant. Many market participants believe the market is trading much more on technical analysis than fundamental valuations. I put myself in that camp. So, why was Wednesday’s price action so significant? We experienced a very rare occurrence, technically known as a key reversal, an outside day, or outside reversal. Each of those terms means the same thing.
In layman’s terms, these key reversals are indicators of a change in the trendline of the market. In an attempt to simplify how a key reversal works, one needs to analyze the trading range of an index or security relative to the prior day’s trading range. If the current day’s trading range incorporates a “higher high” than the previous day, a “lower low” than the previous day, and a “lower close” than the previous day, then the market will have experienced a key reversal. We witnessed that very price action on Wednesday. Allow me to display this price action for a few major market equity indices:
DJIA
on 9/22 High 9843 Low 9772 Close 9830
on 9/23 High 9918 Low 9741 Close 9748
S&P 500
on 9/22 High 1074 Low 1066 Close 1072
on 9/23 High 1080 Low 1060 Close 1061
Nasdaq
on 9/22 High 2151 Low 2137 Close 2146
on 9/23 High 2168 Low 2130 Close 2131
This key reversal is not a guarantee of a continued decline in prices (a key reversal could also be bullish if it made a lower low, a higher high, and a higher close), but it is a strong indicator of such. I am not currently a day trader, but I have fond memories of my trading days on Wall Street using this technical indicator.
Let’s monitor the price action and see if it proves to hold true once again.
