the hAndbook of technIcAl AnAlysIs
in price action characteristic (8). Such increases in price are usually unsustainable
and are therefore potentially bearish. Price also depicts a lack of oscillations during
the rapid run-up. This is a potentially bearish indication as there is a lack of healthy
profit-taking activity, as described by price action characteristic (10).
Hence it is always best to gauge the degree of bearishness or bullishness asso-
ciated with any price bar formation with respect to the 16 price and volume rever-
sal behavior characteristics. All price bar formations should be read in the context
of these 16 price and volume reversal characteristics. This will afford the trader
and analyst a more accurate and consistent assessment of the overall likelihood
for potential price reaction or reversal.
7.3 Popular Bar Reversal Patterns
Key reversal Bar
A bearish key reversal bar forms a higher high than the previous bar and closes
near or below the close of the previous bar. Price may open with a large gap up in
the direction of the uptrend and close on high volume. The wider the key reversal
bar, the more reliable will be the bearish follow‐through action to the downside.
The appearance of any of the 16 price and volume reversal characteristics only
strengthens the degree of bearishness associated with the pattern. The exact con-
verse applies to bullish key reversal bars in a downtrend.
In Figure 7.14, we observe a bullish key reversal bar occurring on high volume.
Price subsequently rebounded in rapid fashion.
In Figure 7.15, we observe a bearish key reversal bar occurring on above av-
erage volume on the daily chart of Apple Inc. The bearish key reversal bar opens
above the high of the previous bar, forms a new high, and subsequently closes
below the previous bar’s close. Note that in many cases, a rapid follow‐through
to the downside may not always unfold. The market occasionally consolidates or
hovers slightly below or around a bearish key reversal bar before declining. We see
this occurring between the 16th and 23rd of July on the chart.
In Figure 7.16, we observe a bullish key reversal bar occurring on high volume
on the daily chart of ITC Holdings Corp. We observe some of the 16 price reversal
Figure 7.13 Overextension Preceded by an Exponential Rise in Price.
