As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

Bulkowski on the Key Reversal, Downtrend

Updated with new performance information on 11/7/24.

Important Results Identification Guidelines Trading Tips Performance Statistics Performance and Failure Rates Measure Rule Trading Performance Trading Example Target Exit, Stock Performance   Target Exit, ETF Performance   Target Exit, Crypto Performance   See Also

Key Reversal, Downtrend

Key Reversal Pattern: Important Bull Market Results

Key Reversal, Downtrend: Identification Guidelines

Key Reversal, Downtrend: Trading Tips

Key Reversal, Downtrend: Performance Statistics

For the following statistics, I used 1,189 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each downtrend key reversal, I found when the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the key reversal and the same peak/valley test after the key reversal. The closest valley or peak before the key reversal is where the trend began. The closest peak or valley after the key reversal is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the key reversal pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the opening price the day after price closed either above the top or below the bottom of the pattern to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for a down trend), I used linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

Key Reversal, Downtrend: Performance and Failure Rates

Table 1 lists the failure rates, sorted by market condition along with the average rise or drop. Although the key reversal is supposed to act as a reversal of the downward trend, I did not make that assumption. Instead, a trade occurred at the open the day after price closed above the top or below the bottom of the key reversal.

A failure occurs when the stock fails to move more than 5% in the breakout direction.

The failure rates may appear high, but that's typical for short-term patterns like the key reversal. The highest failures occur in a bull market.

Key Reversal, Downtrend: Measure Rule

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to move.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Subtract the height from the lowest low or add it to the highest high to get the down/up target.

The best performance of the measure rule occurs when the breakout direction follows the market trend (bull market, up breakout or bear market, down breakout). Trade with the trend.

Key Reversal, Downtrend: Trading Performance

Table 3 shows the performance based on 11,985 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up and down breakouts. The trades used the same setup as listed in Key Reversal, Downtrend, Performance Statistics.

Here's the setup.

• Find a downtrend key reversal
• Wait for price to close either above the top or below the bottom of the key reversal.
• Buy (up breakouts) or sell short (down breakouts) at the open the next day.
• Close out the trade when price moves 7% in the breakout direction.
• A stop placed 7% opposite the breakout direction also closes out the trade for a loss.

For example, in a bull market, the net gain was $95.28 for all trades. The method won 58% of the time and there were 3,930 winning trades. The average gain of winning trades was $702.75.

Forty-two percent, or 2,847 trades were losers. They lost an average of $743.27.

The average hold time was 28 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

Key Reversal, Downtrend: Trading Example

The figure shows a key reversal pattern in 3M (MMM) on the daily scale, shown in the inset.

Price drops leading to the key reversal. Then an outside day appears (which is the key reversal). On the second day of that pattern, price opens below the prior close and closes above the prior high. It's an outside day that stages a lower low.

This downtrend key reversal acts as a reversal of the short-term downtrend.

At A, the stock stages an upward breakout when it closes above the key reversal. At B, the trade begins at the open. Price rises 7% to the target at C, where it's sold.

If the stock turned down, sell 7% below the buy price.

Key Reversal, Downtrend: Target Exit, Stock Performance

I show a key reversal downtrend pattern in the figure, in the red box.

Entry for the upward breakout (the only direction tested) uses a buy stop placed a penny above the top of the chart pattern. A stop loss order placed a penny below the bottom of the chart pattern helps limit losses.

The target exit (sell point) is found by computing the height of the key reversal, multiplying by two, and adding it to the top of the key reversal. In this example, the stock rises far enough to trigger the sale at the target.

For a more detailed explanation of the method I used to test the pattern, see the link.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the key reversal pattern added to the price of the top of the key. I placed a stop loss a penny below the bottom of the pattern.

Tables 4, 5, and 6 show results for bull markets with upward breakouts and an inbound downward price trend. I used 497 stocks in the test.

Table 4. The key reversal exceeds the benchmark performance ($93.25 versus $68.70).

Key Reversal, Downtrend: Target Exit, ETF Performance

The key reversal is highlighted by the red box on the chart. The entry is a buy stop a penny above the top of the key pattern and a stop loss order is placed a penny below the bottom of the pattern.

In this example, the entry triggers at a high price because of the gap. The ETF rises far enough to hit the target exit for a profitable trade.

Testing

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

Table 5. The results of the key reversal in ETFs is slightly better than the benchmark ($65.55 versus $51.31).

Key Reversal, Downtrend: Target Exit, Crypto Performance

The chart on the right shows how I tested performance in cryptocurrencies.

I highlighted the key reversal in the red box. A buy stop a penny above the top of the key reversal triggers a day after the pattern ends. A stop loss placed a penny below the bottom of the pattern does not trigger in this example. Rather, the currency rises far enough to sell at the target.

Testing

This is the same test as the prior one except I used 38 crypto currency stocks instead of common stocks.

Table 6. Trading this pattern in cryptocurrencies results in performance significantly worse than the benchmark. Do not trade this pattern in cryptocurrencies.

-- Thomas Bulkowski

See Also

Below are other short patterns...

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Hook reversal, uptrend
• Hook reversal, downtrend
• Key reversal, uptrend
• Outside Days
• Inside Days
• Open-close reversal, uptrend
• Open-close reversal, downtrend
• Pivot point reversal, uptrend
• Pivot point reversal, downtrend
• Upside weekly reversals
• Downside weekly reversals

An ostrich's eye is bigger than its brain.