|A reversal day takes place when a major battle between buyers and sellers occurs. Call it a perfect storm in equities. A number of conditions must come together to bring about a top reversal or buying climax.|
|Figure 1: Daily chart of United Natural Foods Inc. (UNFI) showing a reversal day and selling signal on the RSI and StochRSI (1 & 3), bearish negative divergence between the Chaikin Money Flow (2) and price (4), and the surge in volume (5) to a 100-day high. The resistance level (black line) that the stock recently broke had been tested and held three times since last April.|
|Graphic provided by: MetaStock.|
|A similar move in the opposite direction has the reverse implication. It is called a bottom reversal or selling climax. The equity is in a downtrend, hits a new low on record volume and then closes above the high of the previous day. The outside day in this case would be an engulfing bull candlestick pattern.|
United Natural Foods Inc. (UNFI) hit a low of $7.00 in December 1999 and hit a high of $28.58 on April 7, 2003. The fact that it took a year to break $26.00 provides a clue that it offers very serious resistance.
|How far it pulls back and whether this represents a trend reversal remains to be seen but this has all the makings of a reversal day (Figure 1). An initial decline in volume followed by a volume increase on falling price would be even more bearish adding greater credence to the reversal. |
Reversals in weekly and monthly time frames generally carry greater significance and often represent major trend reversals.
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