22# One Day Reversal
One Day reversal is the starting point
for most reversal patterns. After an
extended rally the stock gaps higher at
the open to trade at a new high on a
positive news announcement. As the
session proceeds volume expands
significantly but by the close the
entire rally disappears and the stock
One Day reversals are by definition one day events and as such technical targets are not implied but if you look at every major reversal pattern you will quickly see that it all began with a one day reversal
• One day reversals occur because large investors choose to liquidate positions into strength so it is vital that volume accelerate as the stock begins to work lower.
• The stock must close on the day of the reversal at or very near the session lows.
One Day reversals occur because large investors need liquidity to close long positions. They understand that the best way to liquidate a large position is to sell into good news when liquidity is highest -- so they are willing sellers on a day when the stock is making a new high and everyone is saying good things. Investors and media wonder how such good news could have resulted in such poor price performance.
Indeed, over the next several sessions analysts and traders rationalize that the selling was simply overdue given the strong rally leading into the news but every subsequent rally fails. Weeks later the stock is well off its recent highs.