A Reversal Day for United Foods?

04/11/03 08:41:17 AM

by Matt Blackman

Call it a buying climax or top reversal day, but whatever term you use to identify this move, it has 'sell' written all over it.

Security: UNFI
Position: N/A

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.

The stock must be in an uptrend and set a new high, usually early in the day caused by an initial strong move by the bulls. But then sellers move in to sell it down. A battle ensues and by the end of the day, the bears have taken control causing it to close below the close of the previous day.

Volume for the days leading up to the climax shows a steady increase and daily volume hits a multi-week or multi-month high. The greater the daily price fluctuation and the higher the volume for the day, the more tangible the signal.

Another attribute, but one that is not essential, is that the climax be an outside day. This occurs when the candle or bar engulfs the previous day's price range -- that today's high is greater than yesterday's high, and today's low is lower than yesterday's low. An outside day (in this case an engulfing bear candlestick pattern) is just one more sign that a reversal is at hand.

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.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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A Reversal Day for United Foods?

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