Key Reversal Bar (Bullish) Chart Pattern
A Key Reversal Bar (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion, followed by a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.
A Key Reversal Bar is one that develops after a prolonged rally or reaction. Often the trend will be accelerating by the time the price experiences the Key Reversal Bar.
Key Reversal Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of a Key Reversal Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Key Reversal Bar, taking a long position or closing a short position is recommended.
Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Key Reversal Bar.
The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.
The price opens strongly in the direction of the prevailing trend.
The trading range is very wide relative to the preceding bars.
The price closes near or below the previous close (or near or above the previous close in a downtrend reversal).
Volume if available, should be climactic on the Key Reversal Bar, and should expand during the inbound trend.
The presence of a Key Reversal Bar usually signals a reversal of psychology and a subsequent retracement of recent gains. With a large opening gap on continued volume expansion, we are seeing the results of climactic sentiment growth, but as the bar's wide trading range eats up a large part, or the entire opening gap, we have a very strong indication of sentiment reversal.
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