Introduction to Reversal Bar Patterns: Part 1: Over the next few posts, we plan on reviewing single and multi-bar reversal bar structures. In proper context these are among the most important and informative of all tape features. They often mark important turns in the prevailing trend or the completion of a trading range. More practically, they can be utilized to position trades and stops against. These patterns represent easily recognizable change in a market’s supply/demand dynamic and signal that “something important just occurred!” In this piece, we cover the basics of reversal patterns. In coming installments, we will cover key reversals, selling climaxes, springs and upthrusts, and several other common reversal patterns.
There are two kinds of reversal patterns that draw my interest. The first is the reversal bar or pattern that occurs at or near the culmination of a long term trend. This category includes single bar patterns like buying and selling climaxes, and outside key reversal bars. These patterns are more reliable when traded in the context of overbought or oversold markets and mature trends.
The second is either a one or two bar reversal that occurs at the culmination of a pattern, particularly a trading range. Springs and upthrusts fall into this category. Springs and upthrusts are typically shorter term patterns that can mark new trends but are generally more informative to shorter term trades. All these patterns lose their efficacy in dull, low volatility / trendless markets except as an upthrust or spring to a very well defined lateral range.
There are also many common reversal / hook patterns that occur often in almost every trend. Generally, they occur on non-remarkable volume, do not occur near support or resistance confluences, and fail to display the range extension or volume expansion common to more reliable patterns. I tend to ignore these other than for their potential to set up potential short term trading opportunities.
The most reliable reversal bars and structures are characterized by: A significantly wider than normal price range, an open and close near the extreme of the bar/bars and significantly higher than normal volume in the context of the recent past.
Reversals often occur as a response to news that is in harmony with the prevailing trend. In other words, a bearish reversal in a bullish trend often occurs in conjunction with bullish news. The inability to continue the trend despite supportive fundamental news is a clear sign that the trend is in danger.
Most reversal extremes occur against an emotional backdrop. The fear of missing out (FOMO) entices breakout buyers and late trend followers to enter the market at non-advantageous prices. These late adapting weak handed entrants are less committed and generally have less capital than longer term strong handed early adopting entrants. As a result, their willingness to hold their trade is low, their stops are generally tight and vulnerable.
But the more important driver is traders stopping out of painful losing positions. The final convulsive wash out exhausts the available buying/selling power and allows a significant reversal of the existing trend. Important highs are not made until bad positions are flushed.
Oftentimes, the reversal from these structures is dramatic as the last needful buyer/seller has been forced out. But to be trusted, the structure needs to be tested. One of the hardest patterns in the world to trade is the V top or bottom where no test occurs.
Importantly for traders, reversal bar extremes mark a point beyond which the market should not trade. Initial stops placed just beyond the extreme of the reversal bar and moved higher or lower as the market progresses are generally secure. Reversal bars that occur outside a strong support or resistance are far less reliable than those occurring at or near a strong resistance zone or confluence.
The wider the price spread and higher the volume, the more reliable the signal. The best signals generally occur after prolonged trends.
In my experience, the earlier in the day the reversal pattern occurs, the better.
These patterns are fractal. They appear on charts of all perspectives.
The higher the perspective of the structure, the more important it is. In other words, a buying climax on the weekly chart is incrementally more important than the same structure on the daily.
Finally, like anything else, judgement needs to be developed around the patterns. There is no substitute for staring at thousands of charts. Very few patterns set up as they would in the textbook or in my examples, but the principles are generally consistent.
In our next post we will cover the specifics of Key Reversal patterns.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
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WOOD trade ideas
Wood looks goodVery relevant to the housing market is the price of wood. Here in a long term channel up trend with a mid line I can see an inverse head and shoulders, price in the upper half of the channel and a breakout above the 10 month moving average. Could the housing 'crash' be called too early?
Short idea #12- a safe ETF in a downtrendHey all, I think this is a good ETF to keep an eye on. This thing will most surely drop based on its chart, and I see no fundamental reasons why lumber stocks should rise. I am waiting for SPY to reach $389 to short this name; I perceive this is a very safe short.
Possible Short SetupHey guys,
I've been following this ETF since lumber prices have been falling from their sky-high prices. Just now, it looks ready for a markdown phase that could get pretty ugly. Though it is currently well below, if it manages to get to around $83-84 dollars, I think that shorting it there would be an incredible opportunity with minimal risk and solid reward potential.
Disclaimer: I think we're at the end of a market cycle and are currently in the process of redistributing before another leg down in what I believe will be called a crash when it is all said and done.
WOOD LongI wonder how much potential this can have, LBS contracts commercials are hedging is there a probability of going up?
lumber etf Have you seen the prices of wood latelylumber ETF Have you seen the prices of wood lately, last year did some remodeling, 4x8 CDX plywood about 15$ dollars per sheet, today here in Timber Central USA OREGON that same piece if you can find it $62. Inflation is here and production is down but prices are way way up. Go see why? Check builders, paper products, etc.
Also just found WEF a $2 Canada forest co. What $2 watch out.
Thinking of Buying a House? 🪓As many of you know the price of real estate has been rising at an unprecedented rate. Along with this is also the rising lumber rates.
- If you are thinking about buying a house; right now would NOT be an ideal time.
- You are paying an inflated price for a home while also paying for the additional lumber costs, which are up 146% since march! Now many people are selling their homes for a great profit!
- Just like the stock market - Buy Low / Sell High.
This bull run still has legs The bull run will continue with a price target of around $150. The yellow trend line is resistance. The orange trend line is support. I apologize for the scale, I did this on my phone.
WOOD swing short opportunityThis is one of the sector which has been going up pretty fast since the March low. It perfectly back tested the trend line as well as previous all time high from June 2018 perfectly and moving lower. Risk to reward seems pretty attractive.
Timber ETF - WOOD Go LongThe falling wedge is about to break out.
The divergence in the dailies is quite clear both MACD and Histogram which Alexander Elder says is powerful.
The weeklies have a divergence in the H but not in the MACD itself.
So, it is a tradable long.
Going long at US open tonight 11 Sep 2019 with a stop below the gap at 55.60 area - to be specific atop at 55..
The 10 period ADX has broken above 25 in the dailies indicating the possible beginning of a trend.
#Long $WOOD at $56.69 support with #TeamWingtradesWOOD has found support at $56.69 so we are LONG WOOD at $57 for the long term hold.
Bullish global timber and forestry - WOOD etfDespite it's excellent gains of the last year I still reckon that there may be further room to run for this ETF.
Short opportunity ripe for WOODWOOD is now ready to be shorted. The run is over extended, and OBV has already broken down. Pullback expected back to at least 72 level in the long run.
5-0 w/ channel confluenceLooking for a reversal from this point in time, the final leg is in the extension range of 1.5-1.618 which I prefer on my harmonic patterns, also you will notice that a symmetrical channel, if the channel was not symmetrical I would expect price to go higher but this is not the case. Stop will be placed at the 1.618 level. Target which is very optimistic will be the red trendline.
