The Reversal Extension is not necessarily a playable setup but more of a change in mindset. As a long-biased trader, Oliver Kell uses the Reversal Extension as a sign that the market or stock has bottomed and will begin to reverse higher.

When a stock forms a Reversal Extension, it is watched closely for volatility to subside and a pivot to form. Once the market sees a Reversal Extension, individual stocks that have been showing relative strength compared to the market may be leaders in the next cycle.

During a market downtrend, there will be a shortage of stocks setting up or breaking above pivots – Wait for the market to reverse while focusing on stocks withstanding the decline. Meanwhile, leaders begin to emerge as some stocks have already begun to advance through their own Cycle of Price.

Extreme selling pressure will pull the index off the moving averages and eventually snap back up. This newfound support will help the leading stocks find strength to get pushed higher.

The End Of A Downtrend

When a stock is trending downward, the moving averages act as resistance, guiding the stock lower.

A Reversal Extension is formed when the price pulls away from the moving averages, then snaps back up and is accompanied by heavy volume.

Heavy volume at the lows indicates fear has set in, and traders are capitulating their positions. Eventually, sellers will fade away, and buyers will begin to show up.

Price will bounce back into the moving averages with a surge of new buyers.

The Reversal Extension is unique to the character of each individual stock. When the price is extended well below the 10-day moving average, and the moving averages are extended away from each other, begin to look that snap back.

Sometimes, an intermediate bottom is more gradual and forms a rounded bottom. Price may slowly drift sideways while volume decreases, allowing the moving averages to come down into the price.

As a bottom is formed, it is important to understand that any downside momentum has been lost.

Watch for strength to materialize.

  • Rallies after new lows
  • Daily closes near highs
  • Reversal candlestick patterns

Symbol: NVDA
Company:
NVIDIA
Year: 2020

Multiple Timeframes

Like all steps in the Cycle Of Price, Reversal Extensions are best confirmed when multiple timeframes align.

When a Reversal Extension is forming, look to a higher time frame for an area of support. Oliver Kell uses monthly and weekly charts to identify longer trends.

Daily and 65-minute charts are used when buying and placing stops within the intermediate trends. 15-minute charts are then used to pinpoint precise entries.

  • Extensions on a daily chart should see support on a weekly chart
  • Extensions on an intraday chart should see support on a daily chart

When support is found on the higher time frame, the reversal on the lower time frame should be extended from the moving averages.

When placing trades, we can dial into a lower timeframe to see more accurate price action.

Symbol: UBER
Company:
Uber Technologies
Year: 2023

Trading The Reversal Extension

Depending on your style and time frame, trading the Reversal Extension can offer an opportunity for a quick trade or be used to build a position. They often signify that the trend has changed as a cleaner trading range will form later.

Daily Reversal On A Weekly Downtrend

Daily Reversal Extensions are volatile. On a daily time frame, there may be huge price swings between the high and the low. If you take this trade, make sure your position sizing is appropriate and manage risk accordingly.

When the price extends away from the daily moving averages, look to the weekly chart for an area of support.

If the price is supported at a higher timeframe, look for confirmation in volume, which signals a seller capitulation and a change of trend when buyers show up.

Stops are placed just below the low of the Reversal Extension bar. Be quick to take profits and raise stops with the first profit target at the retest of the 20 EMA.

Often, trading the daily Reversal Extension is best avoided. The Wedge Pop may be a better area to add exposure, as there is a clear pivot when volatility contracts, allowing for tighter stops.

Instead, use this pattern to recognize a bottom, then wait for the price to consolidate under the moving averages as it forms a tradable pivot.

Intraday Reversal On A Daily Uptrend

When a stock is in a daily uptrend, Reversal Extensions formed on lower time frames can be used as a pattern to add to positions when a stock pulls back.

As a stock follows the Cycle of Price, it may revisit the rising moving averages as it consolidates before reconfirming higher. Zoom in and look for a Reversal Extension on an intraday chart.

If you see a Reversal Extension on a 5-minute chart, look back to the daily chart to confirm the longer trend. This could be an EMA Crossback or Base n' Break on the daily chart.

The lower time frames will help identify an entry on the higher time frame.

Symbol: ANF
Company:
Abercrombie & Fitch Co.
Year: 2023
Timeframe: Daily/30min

ANF increased an additional 365% from its May 2023 breakaway gap. When we look at a gentle pullback to the 21ema on a 30-minute timeframe, we can see the Cycle Of Price unfold while the higher timeframe cycle continues its uptrend.

Indices And Stocks

During a downtrending market, you should be screening for stocks, looking for relative strength. When the index declines, focus on the strongest stocks, resisting any selling pressure.

A Reversal Extension on an index is a trigger for buying individual stocks.

When an index snaps back from a reversal extension, you may begin to see stocks breaking out of bases, as the leading stocks are already further along in the price cycle.

Be on the lookout for stocks showing relative strength, as they might soon break above pivots formed at a Base n' Break, EMA Crossback, or Wedge Pop.

Symbol: CRWD
Company:
CrowdStrike Holdings
Year: 2023

Once the pressure is lifted off the index after a Reversal Extension, the leading stocks will begin to outperform as they move into new highs.

Get aggressive trading individual stocks when you see a Reversal Extension on the index.

If no stocks are set up, the timing may be wrong. When the index is volatile, individual stocks will have wild price action, too. Once volatility contracts on the index, look for individual stocks setting up in tight basing patterns.

Examples

Symbol: ELF
Company:
e.l.f. Beauty
Year: 2023

As an intermediate trend trader, we would have traded in and out of ELF through its 580% run off its 2022 low. In the Fall of 2023, we were presented with another tradable opportunity.

Once the market topped in the Summer, ELF began to see selling pressure with multiple Exhaustion Extensions resetting the Cycle of Price.

Take note how the price retested the previous weekly support area, saw huge volatile price swings, and a spike in selling volume. The safer entry occurred when a range formed as the moving averages were retested at the EMA Crossback.

Symbol: SWAV
Company:
Shockwave Medical
Year: 2023

Reversal Extensions are not a certainty until after the fact. You may think there are multiple Reversal Extensions throughout this downtrend, but there were no clear pivot points or follow through accumulation volume.

Like most trading strategies, these concepts become an art and are open to interpretation. SWAV potential bottomed but eventually undercut previous lows on huge volume.

Remember a Reversal Extension is a signal that the stock might bottom. The more ideal trade is to wait for a pivot to form and trade through the Wedge Pop or EMA Crossback.

Symbol: Wing
Company:
Wingstop
Year: 2023

You can begin to see it is very difficult to buy stock when the price is trending below the declining moving averages. Wait for a Reversal Extension to form to help identify when the trend might change.

Putting It Together

The Reversal Extension isn't just a trade setup – It's a potential change in market psychology.

Look for volume to increase as sellers capitulate and buyers regain control.

When a Reversal Extension is formed on a lower time frame, confirm the support area using a higher time frame.

During a downtrend, screen for stocks exhibiting strength and are further along in their Cycle of Price. Oliver Kell focuses on the stocks breaking out of bases when the market reverses.

Wait for price confirmation, and look to the strongest stocks setting up pivots in tight tradable ranges.