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Key Reversal Gives Bulls the Green Light

Yesterday morning belonged to the bears, but in the afternoon the bulls came charging back. But was the recovery enough to turn the market up?

Nasdaq ChartTrade of the Day Chart Key

The charge, which actually started late yesterday morning, was led by Nasdaq and resulted in a "bullish key reversal" (BKR) - a pattern that often leads to market rallies. This interesting signal occurs in a single day when a price bar reaches a new low and then turns to close higher than the previous close. It is a signal that in itself has mild significance, but when combined with a deeply oversold market as measured by the momentum and stochastic indicators (shown), it is often the first indicator of a pending rally.

And if that is not enough to gain the attention of traders, consider this: When a BKR occurs at an important support line it gains even more significance. Yesterday, it occurred at the key 50-day moving average (blue line), as well as the support line of a pennant (triangle.)

Russell 3000 ChartTrade of the Day Chart Key

The Russell 3000 executed a reversal, but with lesser significance than the key reversal flashed by the Nasdaq. However, its reversal also jumped to close above the important 50-day moving average as well, as the red-dotted intermediate trendline.

The bull market is alive and well. In addition to yesterday's positive result, note that the intermediate and major trends are up as demonstrated by higher highs and higher lows. Additionally, note that the faster moving averages are above the slower, i.e., the 20-day is above the 50-day, which is above the 200-day - a requirement of a bull market - and each has an upward slant, another strong positive.

Finally, true chartists will love this: The patterns that accompany all bull markets - flags and pennants - are very evident in the charts of the last eight months of these indices. But of the two, flags are the more important and almost always break to the upside following a jarring round of lower highs and lows. This pattern can last for several weeks, during which time it flushes out the weak holders of stocks, preparing the way for the "serious money."

Go buy some stocks on this dip and forget about the bricks in the "wall of worry."

For one stock to buy on a dip, see the Trade of the Day .

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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