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Equity Market Key Reversal on 9/23/09

Posted by Larry Doyle on September 23, 2009 9:16 PM |

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.

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


  • Nigel

    Way to go.

    The blogdom and Main Stream Media (i.e. corporate bought touts) are full of folks covering,hedging or otherwise engaged in CYA face saving when speaking about markets and where they are heading.

    While your post doesn’t equate to standing on a rooftop and shouting out “the end is near”, it is refreshing to get a casual, but pointed tip that someone with some credibility thinks there’s a change in the wind.

  • Adamchik

    Not so fast. The S&P could go 50% or more lower from here, but there is plenty of momentum in it right now.

    If you look at volume-based indicators (like TradeGuider), they show that today was a change in bias, but not really a change in trend. The last daily change in S&P 500 trend was Sept 1st, which quickly turned around.

    Also, from the Elliott Wave point of view, you probably need another 3% fall from here in short order to show a change in trend. Even better would be a fallout of the current regression channel, maybe 4.5% lower.

    Timing is everything – short term, be cautious about being a bear.

  • Mike

    Alright Larry, I’m gonna take your advice and use 100:1 leverage to go SHORT and take the slide down!

    Just kidding, but I’ll certainly keep paying close attention.

  • Petricone456

    Here is an excerpt from Art Cashin’s morning e-mail that addresses yesterday’s price action in equities (Art Cashin is the Manager of UBS’ Floor Trading Operations at the NYSE):

    A Classic Reversal? – Yesterday’s whipsaw had many aspects of a classic reversal pattern. Our good friend and trading
    veteran, Dennis Gartman took note of the “near textbook reversal” in his letter this morning. Dennis noted that the rally portion made multi-month highs after taking out Tuesday’s highs. The subsequent reversal then took out Tuesday’s lows on higher volume.

    Whether Wednesday’s reversal was a major turning point will only be assessed by the action of the next several days. The bulls need to rally above yesterday’s highs to regain control. They also will try to hold above an important support level of 1055/1058 in the S&P.

    Two possible scenarios that could hurt the bulls are being discussed. One would be for the markets to open better today
    and then close down. Another would be for stocks to “gap down” and stay there.

    Traders will watch the next seven trading days very carefully.

    • Larry Doyle

      No doubt that Mr. Cashin and Mr. Gartman must read Sense on Cents!! (LOL)

      The points they raise are consistent with my view that the market may have experienced a key reversal yesterday. Stocks trading a little heavy currently. We’ll see.

      Thx for sharing those insights.

  • TeakWoodKite

    The reversal I have a hard time visualizing, but as you have often said LD, the “normal” rules may not apply.

    If I understand the market being described is a trend upward? If so my next question is why? The ball and chain have not gone away, so what has changed?

    LD, I cashed out an account that was setup for my son. there were three trades to made and as the trader went thru them he said that Fannie May was the last one. I started to laugh when he said it, and I apologized for laughing but he was chuckling too.

    • Larry Doyle


      You, me, and plenty of people have a hard time gauging the markets because of the difficulty in assessing just how large, how wide, and how encompassing is the hand of the Fed.

      While markets and the economy can at times operate in their separate domains ultimately they will work their way back to the same page. That process is more protracted at this point in time.

      • TeakWoodKite

        Thanks LD, for the insight and for calling the fathoms in these uncharted channels.

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