Equity Market Formed a Potential Key Reversal on Wednesday

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:

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

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.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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