Reversal System

Understanding

The Reversal system is a price-based model born through the theory that specific pressure points exist within price movement. If enough pressure builds in either direction, there will eventually be a point which, if exceeded or penetrated, signals a potential change in trend.

Think of Reversals as an indicator of those potential pressure points in market price – offering key areas of support and resistance. Reversal points are generated each time a market produces a new isolated high or low, and when a Reversal is breached (“elected”), it could signal a potential change in trend, thus a potential market entry or exit point.

Reversals Points are classified into four categories (Major Reversal, Intermediate Reversal, Minor Reversal, Immediate Reversal) depending upon how important the system determines a particular high or low is that generated the Reversal:

• Major Reversal Points – generated from the deepest low or the highest high within a given time series. Example: The 1980 $875 high in gold would be classified as “Major Reversal Point.”
• Intermediate Reversal Points – generated from a high or low generated from that appears within a long-term trend. Example: The 1983 high of $514.30 would be referred to as "Intermediate" Reversal Points.
• Minor Reversal Points – generated from a reaction high or low that appears within a short-term trend.
• Immediate Reversal Points – very short-term trend.

The Major and Intermediate Reversals bear more prominence than the Minor and Immediate. Therefore, be mindful of this when analyzing Reversals.

Reversals are also differentiated into “Bullish” or “Bearish”

• Bearish Reversals – generated from a High. If the market should close below the Reversal point, then the uptrend will be "reversed" into a bearish or declining trend.
• Bullish Reversals – generated from a Low. If the If the market should close above the Reversal point, then the downtrend will be "reversed" into a bullish or increasing trend.

Each high or low generates four separate Reversal points; Immediate, Short, Intermediate, and Long-Term. An important shift in the market’s trend will only occur when all four of the Reversal points have been elected.

Sometimes two or more of the reversal points generated from the high or low would be the same number or be separated by a single basis point. When the election of these types of reversals occur it signals an abrupt change in trend. These reversals are known as Double, Triple or Quadruple reversal points:

• Double Reversal Points – generated twice by the same high or low. Historically, double reversal points occur a few times during the course of one year on a daily level and once every two or three years on a weekly level.
• Triple Reversal Points – generated three times by the same high or low. Triple Reversal Points are extremely rare and only occurred twice; once in Gold in 1976 and once in the US Treasury Bond futures in 1989.
• Quadruple Reversal Points – generated by the same high or low are the same. A Quadruple Reversal Point – generated in 1929 in the US Stock Market and has not been generated since

The "election" of a Reversal point is achieved only on a closing basis, if the Reversal point is breached (closing above the Bullish Reversal, or below the Bearish Reversal).

Example: If Gold was $1000.00 and a bullish Reversal was $1001.00, the Reversal would not be elected unless the closing price was greater than $1001.00.

Note: Generally when a Reversal is point elected, but the price is substantially below or above the number, the market will tend to retest the Reversal before it resumes the indicated trend. Reversals that are elected by only a few ticks offer the best indication of immediate follow-through.

A Reversal Gap is the void between two Reversal points. Whenever large gaps form between Reversal points, sharp swings become more possible as the market moves from one side of the GAP to the other leading to a higher degree of panic.

When Reversal points are evenly dispersed, there are a greater number of support and resistance levels to penetrate. This requires more energy within the system to create a panic situation. But when Reversals are clustered together in particular areas leaving GAPS between them, then price movement can become much more abrupt.

Example: The S&P 500 Futures established a wide Reversal gap from the August 1987 major high, between 28610 and 18100. The reversal system generated reversal points (technical support) between 330 and 286, but between 286 and 181 there was a large void, resulting in a large Reversal gap. Once the S&P 500 closed below the 28610 level on that fateful Friday, the Reversal was filled on Black Monday.

• The election of the first of a series of Reversal points indicates that a move to the second Reversal is likely. An election of the second Reversal point signifies a move to the third point is probable and so on.
• How fast the Reversal points are elected from a major low or high can classify the degree of the move. The momentum of a move will be strong if all of the daily and weekly Reversals, as well as at least one monthly Reversal generated from a major high or low, are elected within three months.
• The speed at which a market begins to elect its Reversal points from a major high or low is important. Historically, the longer it takes to elect a Reversal the lower the degree of volatility thereafter.
• Experienced traders and financial professionals who are well versed in our models, and market risks, could use Reversal points for the opposite of their intended use. Example: A trader could place an order to buy against a bearish Reversal with a protective stop just below. But this is strongly advised against for non-professionals.
• Historically the Reversal system works best under extreme volatility; the greater the market panic, the higher the potential accuracy of the model.
• During extremely narrow sideways congested patterns, it is best to avoid the Reversals generated from every minor temporary high and low within the trading range and focus on the intermediate Reversals.