Sense on Cents

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.

Thoughts, comments, questions always appreciated. Don’t be bashful.

LD

This entry was posted on Wednesday, September 23rd, 2009 at 9:16 PM and is filed under General, markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.