Option Letter Daily

Another tool used by traders is the formation called the reversal day. By itself, it’s not of major importance, but in the context of other technical information, it can be significant. The reversal day goes by several names - the top reversal day, the bottom reversal day, the key reversal day and the buying or selling climax.

A reversal day takes place at the bottom or top within a trend. The general definition of a top reversal day is the setting of a new high within an uptrend that is followed by a lower close on the same day. A bottom reversal day would be a new low during the day followed by a higher close. The higher high and the lower low usually occur at or near market opening.

The signal is more significant for a possible trend reversal when the day’s range is wider and volume is heavier. Below are two bar charts showing price ranger and volume. Note, in both, the heavier volume occuring on the reversal day. An outside day is formed when both the high and the low on the reversal day exceed the range of the previous day. An outside day is not a requirement for a reversal day, but it does carry more significance for stock trading.





A selling climax is a bottom with a dramatic turnaround at the bottom of a down move where all the longs have been forced out of the market by heavy volume. A vaccuum is created over the market, which prices quickly rally and fill, with the subseqent absence of selling pressure. The selling climax is one of the most dramtic examples of a reversal day. It may not mark the final bottom in a falling market, but it does signal a significant low.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy’s day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.