How to Use the Reversal System
The Reversals provide a map of precisely how far a market can move against the current trend without actually “reversing” the trend itself. This is true with all levels of Reversals generated from minor reactions to those of the major high or low. This is a very important concept to understand, for the fate of economies and markets in the very long-term depend upon how a market interacts with its Major Reversals.
For example, as stated previously, the Major Weekly Bearish Reversal generated from the $875 high in gold during 1980 was $280.50. Because gold fell moving into 1985 and bounced precisely off of this important Reversal, there is something more important being generated beside a mere buy or sell signal. The long-term trend of any market DOES NOT change until all Weekly and Monthly Reversals from a MAJOR high or low are elected. The fact that gold FAILED to elected the Major Weekly Bearish Reversal at $280.50 suggested that gold remained in a long-term bull market and is still likely to produce new highs during the Nineties above that of 1980!
Another example of long-term indications provided by the Reversal System took place at the bottom in price activity during the 1987 stock market crash. Since the Monthly Bearish Reversal of 18100 was NOT elected during the ’87 Crash, the long-term uptrend had NOT been reversed! This was one vital factor in the forecast that Princeton made stating that new highs would be achieved by 1989 the very day the market bottomed! The Reversal System not only provides us with specific buy and sell signals, it also provides us with a clear indication of a market’s strength or weakness.
It is also possible for the experienced trader to use our Reversal Points in the OPPOSITE intended use. For example, one could place an order to buy against a Bearish Reversal with a protective stop just below. Using this methodology, one may have attempted a long position at the 1985 low in gold just above $280.50 using a protective stop at $279.50. If it is going to work at all, it must work in a precise manner. The same strategy could have been used at the low in 1987. It is also possible to SELL against a Bullish Reversal with a stop just above. This will allow you to adopt short positions during false or reaction rallies.
Another one of our more famous forecasts was projecting the major high for the Nikkei to within a few basis points for the last week in 1989, as well as the precipitous decline down to the 19000 level in 1990. This example illustrates another important indication that is provided by our Reversal System. The degree of the move can be classified, to some extent, by HOW FAST the Reversals are elected from a MAJOR high or low.
In November 1989, we projected a “final major top” to occur ideally in the last week of December 1989 near the 39000 level. Our exact target was 38773. The actual high occurred at 38957 the week of December 25. The price and time were provided by our Technical Projection and Empirical Timing Models. Nevertheless, it was our Reversal System which mapped out the events that would unfold thereafter.
The first major weekly Bearish Reversal of 35882 was elected the week of February 19, 1990. This development kept us firmly on the bearish side looking at the next major weekly Bearish Reversal of 32642 and even more importantly, the major monthly Bearish Reversal of 32854. This first Monthly Bearish Reversal was elected on the closing of March 1990 and was the first Monthly Bearish to be elected in 7 years! This enabled our models in April 1990 to project a target low of 19000 which actually occurred the first week of October 1990. Whenever ALL daily and weekly reversals are elected in conjunction with AT LEAST ONE monthly reversal from a Major high or low within 3 months of that major event, the momentum of the move thereafter will be exceptionally strong. This was the case concerning the Nikkei in 1990. It was NOT the case for gold in 1980 nor did this occur in the heat of the 1987 Crash. Once the Nikkei elected its first Monthly Bearish Reversal at the 32854 level, there was no effective long-term support according to our Reversal System until this market reached the 19000-17337 area. With hindsight, all our forecasts to this effect proved to be correct as the Nikkei fell into October 1990.
Just how soon a market begins to elect its Reversals from a major high or low is very important. In gold, from the February 1983 high, the first Monthly Bearish was NOT elected until November that same year. Therefore, the subsequent decline was sharp yet orderly and was contained within a 40% range from that high. In the case of the Nikkei, a Monthly Bearish being elected within 3 months warned of a steeper decline which was closer to the 50% level. We have found the longer it takes to elect a Reversal the lower the degree of volatility thereafter!
We have also noticed, over time, that the best and most powerful signals generated by the Reversal System are ALWAYS the signals which fundamentally appear to make the least amount of sense. You could also rephrase this to simply say that the strongest signals are ALWAYS the ones that take the greatest amount of courage to trade! Yet at the same time this make a lot of sense. If you find it difficult to believe a particular buy or sell signal on this model in the midst of wild trading patterns, then it is likely that no one else will believe it either. This normally occurs at the point of maximum entropy in a market which means that the smallest amount of pressure at that moment will indeed create the greatest amount of change.
Defining the Gap
One extremely useful discovery in actual market experience with the Reversal System has been the manner in which markets establish gaps between key Reversals. A gap is a void between two Reversals or groups of Reversals. Whenever a gap has formed within a market, significant sharp swings become possible as the market moves from one side of the gap to the other.
For example, the US stock market established a wide gap in support at the 1987 high. From the August 1987 high in the US stock market, the gap which appeared was excessively large. In the S&P 500 futures, that gap formed between 28610 and 18100. The model defined various levels of technical support between 330 and 286, but between 286 and 181 there was nothing that could be found on our models. Once the S&P 500 closed below the 28600 level on that fateful Friday, the gap was filled on Black Monday! All big panic moves take place ONLY when such gaps exist within our Reversal Points.
If you are actively trading a particular market, we suggest that you write down the Reversals and Indicating Ranges from our reports in a vertical format. This will enable you to quickly see where these gaps exist so you will NOT be taken by surprise in your trading.