Maybe you've felt it. Every once in a while, you feel really good. You begin to believe that you know everything there is to know about a subject. You know that's not true, but the feeling persists. And such was the case when I started reading analyst John Murphy's latest work, The Visual Investor.
After reading the first chapter, however, I knew I was wrong; I didn't know everything there was to know about technical analysis. I discovered weekly reversals. So what are they and how well do they really work? I decided to find out.
WHAT'S A WEEKLY REVERSAL?
Murphy defines a weekly reversal and shows two examples:
The weekly reversal is another simple market formation that's worth looking out for. An upside weekly reversal occurs during a market decline and can be seen only on a weekly bar chart. A stock starts the week with a lot of selling and usually breaks under some type of support level. By week's end, however, prices have turned dramatically upward and close above the previous week's price range. The wider the weekly price bar, and the heavier the trading volume, the greater the significance of the turnaround.An example of a weekly reversal according to Murphy's definition can be seen in Figure 1, a depiction of International Business Machines [IBM]. Although the opening price was not sharply higher, it did close well below the prior week's trading range. The reversal occurs amid an uptrend of prices. Volume on the reversal is comparatively high, supporting the reversal. Figure 4, a chart of Asa Holdings [ASAI], shows weekly reversals according to my definition. I probably don't need to state the obvious, but I will anyway: Weekly reversals don't occur on daily time scales. You must use weekly charts to see them.A downside weekly reversal is just the opposite. Prices open the week sharply higher and then collapse at week's end. While that pattern alone isn't usually enough to turn the chart bearish, it is enough to warrant closer study of the situation and to consider taking some type of defensive action. Weekly reversals take on more significance if they occur in the vicinity of historic support or resistance levels.
Stocks don't move in a straight line. They ascend, then pull back before continuing their rise. Sometimes, the downside reversal will appear a week or two after the stock peaks and starts retracing its rise.
