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  
  Up arrow44,200 or 41,750 by 01/01/2025
  Down arrow16,100 or 17,700 by 01/01/2025
  Up arrow1,050 or 975 by 01/01/2025
  Up arrow20,500 or 19,300 by 01/01/2025
  Up arrow6,100 or 5,775 by 01/01/2025
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  
  Up arrow44,200 or 41,750 by 01/01/2025
  Down arrow16,100 or 17,700 by 01/01/2025
  Up arrow1,050 or 975 by 01/01/2025
  Up arrow20,500 or 19,300 by 01/01/2025
  Up arrow6,100 or 5,775 by 01/01/2025

Bulkowski on the Key Reversal, Uptrend

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

The key reversal
Key Reversal, Uptrend

 

Key Reversal, Uptrend: Important Bull Market Results

Overall performance rank (1 is best)**: 16/23
Break even failure rate*: 45% (Up breakouts)
Average rise*: 7%
Percentage meeting price target*: 71%
 
The above numbers are based on hundreds of perfect trades as of 3/12/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** Based on the average rise compared to other small patterns with upward breakouts in a bull market

Key Reversal, Uptrend: Identification Guidelines

CharacteristicDiscussion
2 barsThe pattern is composed of two bars.
UptrendLook for the pattern in a short-term uptrend.
Outside dayThe pattern forms an outside day. However, in this case, look for an open above the prior close, a close below the prior low, and a high above the prior day's high.

Top of page

Key Reversal, Uptrend: Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the uptrend. However, testing shows that 51% actually continue higher.
TradeTrade in the breakout direction. A breakout occurs when price closes either above the top or below the bottom of the pattern.
Measure ruleThe key reversal fulfills the measure rule 71% of the time (bull market, up breakout). That is, measure the height of the pattern and subtract it from the low price to get a downward target. For upward targets, add the height to the price of the top of the pattern.

Key Reversal, Uptrend: 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 uptrend 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 an up 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, Uptrend: Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout45%7%
Bull market, down breakout50%-6%
Bear market, up breakout39%9%
Bear market, down breakout33%-11%

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 upward trend, I did not make that assumption. Instead, I let the pattern decide the breakout direction.

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.

Top of page

Key Reversal, Uptrend: Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout71%
Bull market, down breakout62%
Bear market, up breakout65%
Bear market, down breakout66%

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 in a bull market, with 71% of patterns reaching their target. Notice that the breakouts in line with the market trend (bull market, up breakout or bear market, down breakout) reach their targets more often than the counter-trend trades.

Key Reversal, Uptrend: Trading Performance

Table 3: Testing the Key Reversal, Uptrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$71.11$(108.82)$(40.53)$46.41
Wins56%41%48%52%
Winning trades1,8672,975355906
Average gain of winners$707.73$747.90$713.07$760.74
Losses44%59%52%48%
Losing trades1,4564,277379849
Average loss($745.22)($704.73)($746.41)($715.89)
Average hold time (calendar days)30271814

Table 3 shows the performance based on 13,177 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, Uptrend, Performance Statistics.

Here's the setup.

For example, in a bull market, the net gain was $71.11 for all trades. The method won 56% of the time and there were 1,867 winning trades. The average gain of winning trades was $707.73.

Forty-four percent, or 1,456 trades were losers. They lost an average of $745.22.

The average hold time was 30 calendar days.

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

Top of page

Key Reversal, Uptrend: Trading Example

Key reversal in 3M (MMM)

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

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

If this were a reversal of the uptrend, you would see a downward breakout. That occurs here at A. Buy at the open the next day, B.

Hold until price either gains 7% or loses 7%. That occurs at C.

Key Reversal, Uptrend: Target Exit, Stock Performance

key reversal in DDD

I show a key reversal uptrend 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 does not rise far enough to trigger the sale at the target. Instead, the stock hits the stop loss order and the trend ends for a loss.

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

Top of page

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. The uptrend benchmark uses a two-bar random 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: Testing the Key Reversal, Uptrend in Stocks with Height Exit
Metric Key Reversal in
Uptrend 
Uptrend
Benchmark
Trades3,8006,018
Average profit/loss per trade$52.36$48.01
Win/loss ratio41%40%
Average hold time (days)1415
Winning trades1,5632,402
Average gain of winners (days)7%7%
Average hold time of winners1819
Losing trades2,2373,616
Average loss-4%-4%
Average hold time of losers (days)1213

Table 4. The key reversal marginally exceeds the benchmark performance ($52.36 versus $48.01).

Top of page

Key Reversal, Uptrend: Target Exit, ETF Performance

key reversal in ITA

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 the day after the pattern ends and it reaches 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: Testing the Key Reversal, Uptrend in ETFs with Height Exit
Metric Key Reversal in
Uptrend 
Uptrend
Benchmark
Trades1,1526,675
Average profit/loss per trade$29.98$48.84
Win/loss ratio42%45%
Average hold time (days)1113
Winning trades4882,980
Average gain of winners (days)4%4%
Average hold time of winners1417
Losing trades6643,695
Average loss-2%-3%
Average hold time of losers (days)911

Table 5. The results of the key reversal in ETFs is awful. Do not trade the key reversal uptrend in ETFs.

Top of page

Key Reversal, Uptrend: Target Exit, Crypto Performance

key reversal in AR

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 two days after the pattern ends. A stop loss placed a penny below the bottom of the pattern closes out the trade for a loss.

Testing

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

Table 6: Testing the Key Reversal, Uptrend in Crypto Currency with Height Exit
Metric Key Reversal in
Uptrend 
Uptrend
Benchmark
Trades312,491
Average profit/loss per trade$116.06$214.65
Win/loss ratio45%47%
Average hold time (days)87
Winning trades141,182
Average gain of winners (days)11%12%
Average hold time of winners116
Losing trades171,309
Average loss-7%-6%
Average hold time of losers (days)86

Table 6. Trading this pattern in cryptocurrencies results in performance significantly worse than the benchmark. Do not trade this pattern in cryptocurrencies. Also, because of few trades, I'd avoid trading this pattern, too.

-- Thomas Bulkowski

Top of page

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notice for paid links: "As an Amazon Associate I earn from qualifying purchases."

My Stock Market Books
My Novels

Copyright © 2005-2024 by Thomas N. Bulkowski. All rights reserved.
Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
Some pattern names are registered trademarks of their respective owners.
Home Advertise Contact Privacy/Disclaimer

Every time you lick a stamp, you're consuming one-tenth of a calorie.Smiley