Double Key Reversal

The Double Key is a pattern that appears commonly in the S+P – at significant turning points. One occurrence appeared in the S+P, two weeks before the early-August 1997 high (and the largest correction in over 7 years that followed this pattern). Another example occurred in early-1997, in the Silver market, and identified a critical low in mid-January.

Double the strength A Double Key Reversal pattern is made up of a basic key reversal reinforcing a preceding key reversal in the same direction – with the second overlapping the first.

The Double Key Reversal, as its name describes, is a pair of overlapping key reversals. It is one key reversal reinforcing a preceding key reversal — both in the same direction (see accompanying illustration). For this to occur, certain criteria must be met while others should be met.

First – a market must be entering new high or low ground on a near-term basis.

Second – in the case of a developing daily Double Key Reversal lower, it is very helpful if the market is testing weekly or monthly resistance (specific calculations can be found in Eric Hadik’s Tech Tip Reference Library ). In the case of a developing daily Double Key Reversal higher, the market should be testing weekly or monthly support.

Third – the initial day’s action should end with a close in the lower 25% of the daily range (in the case of a developing Double Key Reversal lower) or in the upper 25% of the daily range (in the case of a developing Double Key Reversal higher).

Next – the second day’s action is usually subdued with a narrow range, spiking slightly above the high and closing below the close of the first day in a developing Double Key Reversal lower. The inverse is expected in a developing Double Key Reversal higher.

Finally – the market will open the third (trigger) day and rally to new highs before reversing and closing below the second (and consequently the first) day’s close. That applies to a daily Double Key Reversal lower while the inverse would apply to a daily Double Key Reversal higher.

To quickly review… a Double Key Reversal is a new high and lower close followed by another new high and another lower close (or vice-versa in a down-trend that is reversing up) – all within a 3-tick window. It is most effective when the 2nd reversal day is also an outside day. The Silver market in January provided a classic example of this pattern at a decisive bottom in the market. That subsequently ushered in a $0.70 rally in the ensuing 6 weeks. (See accompanying chart).

Additional details & diagrams can be found in Eric Hadik’s Tech Tip Reference Library