Introduction
An Outside Reversal is an impactful price pattern that signals a potential trend change on price charts. This powerful two-day pattern emerges when a security’s daily high and low surpass the previous day’s high and low. This pattern is also referred to as a bullish engulfing (following a downtrend) or bearish engulfing (following an uptrend) when illustrated on candlestick charts.
Key Insights
- Reversal Pattern: The Outside Reversal spans two days and indicates a reversal opposing the prevailing trend.
- Day Differentials: The first day typically has a smaller price range, while the second day exhibits a larger range.
- Engulfing Term: In candlestick analysis, this pattern is often called an engulfing pattern.
Cracking the Code of Outside Reversal Patterns
The Outside Reversal is a two-day price pattern visible on candlestick or bar charts, essential for technical analysts in identifying trend reversal signals. This pattern demands precision and is highly regarded for its accuracy when recognized correctly. Coupling this identification with thorough analysis involving trend directions, support and resistance levels, and other technical studies enriches its predictive capabilities.
Confirming the Pattern
Volume and support/resistance levels further reinforce the Outside Reversal pattern’s reliability. For instance, if a stock’s price forms a bearish Outside Reversal near trend-line resistance with high bearish volume, it is far more credible than a similar pattern occurring amidst sideways movement with below-average volume.
Bullish Outside Reversal
A Bullish Outside Reversal, or Bullish Engulfing, unfolds when the second candle moves higher. Imagine a stock dipping slightly lower on day one, opening lower on the second day, but then catapulting sharply by day’s end, capturing bull dominance and forecasting a trend change.
A successful example is Amazon.com Inc.’s (AMZN) resurgence, rallying post-outside reversal and continuing on an upward trajectory.
Bearish Outside Reversal
A Bearish Outside Reversal, or Bearish Engulfing, arises when the second candle experiences a constructive move lower. Picture a stock rising on day one, continuing higher on the second but reversing sharply by its close, as bearish forces decisively overtake the trend.
Consider the case of Cisco Systems Inc. (CSCO), which witnessed a brief rally followed by a sharp decline, proclaimed by the bearish outside reversal.
Conclusion
Mastering the Outside Reversal pattern requires keen observation and careful analysis, but it equips traders with a reliable tool to gauge imminent trend reversals, maximizing trading success.
Related Terms: bullish engulfing, bearish engulfing pattern, price pattern, candlestick, technical indicators.
