Outside Reversal
Candlefocus EditorInvestors spot the outside reversal by looking for a wide-range day that engulfs the prior day’s price action. The break of either the previous high/low or the opening/closing levels typically confirms that a market reversal is underway. This type of price action, especially when it occurs on a key support/resistance level, can signal to investors that a major trend reversal may be underway and cue further analysis.
In candlestick analysis, an outside reversal is seen as a bullish potential sign when the wide-range day closes higher than yesterday’s high. This confirms that the buyers are taking control of the market and that a possible reversal could be in play. Meanwhile, an outside reversal is seen as a bearish potential sign when the wide-range day closes lower than yesterday’s low. This also confirms that the sellers are taking control of the market.
Outside reversal patterns may also be accompanied by technical analysis signals such as breakouts, divergences, and moving averages. These signals can often help to confirm that a trend reversal is underway, and can provide potential price targets and stop loss levels.
Overall, the outside reversal is a powerful tool that can help investors spot potential trend reversals. It can also help investors find entry points when the break of either the previous high/low or the opening/closing levels confirms that a major trend reversal is indeed underway. While these types of signals should always be verified with further technical analysis, an outside reversal can help investors identify the beginnings of a new trend and provide useful insight into the possible direction of the market going forward.