Closing Price Reversal at Top

The closing price reversal at a top occurs during an uptrend. The closing price reversal bar typically gaps up at the open above the prior day's close and then falls downward closing within the previous day's price bar. The main requirement is that the close of the closing price reversal bar must be near its low and below the prior day's closing price. Note that this pattern does not show as much strength from sellers as the key reversal pattern because sellers were unable to make a lower low. In fact, technically, because the high of the closing price reversal bar has a higher high and has a higher low, the uptrend is still intact. In fact the only bearish trait is that sellers rejected the higher highs and prices closed near the low. The closing price reversal at a top is roughly equivalent to the candlestick version called the dark cloud cover.

Closing Price Reversal at Bottom

The closing price reversal at a bottom occurs during a downtrend. The closing price reversal bar typically gaps down at the open below the prior day's close and then rises throughout the day, closing within the previous day's price bar. The main requirement is that the close of the closing price reversal bar must be near its own high and be above the prior day's closing price. This pattern does not show as much strength from buyers as the key reversal pattern because buyers were unable to make a higher high. Moreover, because the closing price reversal bar has a lower high and has a lower low, the downtrend technically is still intact. In fact the only bullish attribute is that buyers rejected the lower lows and prices closed near the high. The closing price reversal at a bottom is roughly equivalent to the candlestick version called the piercing pattern.

Chart Example of Closing Price Reversal at Top

The chart above of the 20+ Year Treasury Bond ETF (TLT) illustrates a top formed by a closing price reversal pattern. Six days of higher highs and higher lows form the uptrend. The closing price reversal bar opens with a gap up making a higher high, but prices quickly fall down the whole day closing near the low and closing far below the previous day's close. Prices begin a new downtrend from there.

Chart Example of Closing Price Reversal at Bottom

A closing price reversal bottom is shown at a bottom on the chart above of the S&P; 500 ETF (SPY). There is a preceding downtrend of five bars with lower highs and lower lows. The closing price reversal bar gaps down opening below the prior day's low, prices move a little lower and find buyers. Buyers then push prices up closing near its high and far above the prior day's closing price.

Works Referenced

1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html