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Key reversal

A Key Reversal is a technical analysis pattern that signals a potential turning point in a stock’s trend — either from bullish to bearish or vice versa. It appears on a price chart and is formed when a stock makes a new high (or low) for the current trend, but then closes in the opposite direction, often with strong volume. Key reversals are used by traders to spot momentum shifts and potential entry or exit points. While not foolproof, they can provide early warning signs that buying or selling pressure is reversing.
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There are two main types:

  • The price opens higher than the previous day.
  • It makes a new high, continuing the uptrend.
  • But by the end of the day, it closes below the previous day’s close — indicating strong selling pressure.
  • Often accompanied by above-average volume.
  • The price opens lower than the previous day.
  • It makes a new low, continuing the downtrend.
  • But then rallies to close above the previous day’s close — signaling a potential shift to buying strength.
  • Strong volume reinforces the signal.

In both cases, the key elements are:

  1. New high or low
  2. Reversal in closing direction
  3. Higher-than-normal volume (optional but adds confirmation)

Key reversals are valued for their simplicity and psychological insight. They capture moments when market sentiment shifts rapidly — from optimism to fear, or fear to hope.

Traders may use them to:

  • Exit winning trades before a trend reverses
  • Enter trades at the early stage of a new trend
  • Confirm breakouts or breakdowns
  • Combine with other indicators (like RSI or volume) for stronger signals
  • Look for volume confirmation — high volume adds weight to the signal.
  • Consider the overall trend — reversals are more reliable after extended moves.
  • Use them on daily or weekly charts — they’re less meaningful on very short timeframes.
  • Combine with support/resistance levels — a reversal near a major zone carries more significance.

Like all chart patterns, key reversals are not guarantees. Sometimes a reversal may occur but be quickly undone the next day. False signals can occur in choppy or news-driven markets.

They work best when used as part of a broader trading strategy — not in isolation.

  • A key reversal is a strong one-day move in the opposite direction of the current trend.
  • It often signals exhaustion in the current trend and the start of a potential reversal.
  • Confirmation with volume and other indicators improves reliability.
  • They’re most effective when appearing at overbought or oversold levels after a sustained move.