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The Reversal System

Reversal System

In any market or economic statistic, there is some point, if crossed, which marks the beginning of a change in trend. These specific price levels exist in all time series and might be thought of as key pressure points. They reflect the invisible inflection point related to entropy. When the reversal points are elected, they provide a buy or sell signal for the investor. This system provides precise trading targets, which will manifest themselves into buy or sell signals.

Reversal Points (or “Reversals”)

Reversals Points offer areas of key support and resistance within any market or economic statistic. They are the primary pressure points within the price activity.

Reversal Points are generated each time a market or economic statistic produces a new isolated high or low, either on an intraday or closing basis. Reversals Points are classified into three categories; Major, Intermediate or Minor depending upon the importance of the particular high or low.

  • Major Reversal Points are 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 are 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 are generated from a reaction high or low that appears within a short-term trend.

Reversals that are generated from highs or lows are also differentiated into “Bullish” or “Bearish” reversals.

  • Bearish Reversals are 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 are generated from a Low. 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 are 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 are 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 are generated by the same high or low are the same. A Quadruple Reversal Point was generated in 1929 in the US Stock Market and has not been generated since

Electing a Reversal Point

The "election" of a reversal point is achieved only on a closing basis.

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.

Generally when a reversal is point elected but the price is substantially below or above the number, the market will 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.

Reversal Gaps

A Reversal Gap is the void between two reversal points. Whenever large gaps form between reversal points, sharp swings become 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.

How to Use the Reversal System

  • The election of the first reversal point 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.
  • Experienced traders 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.
  • 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.
  • Historically the reversal System is that it works best under extreme volatility; the greater the panic the higher the accuracy.
  • 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.