Hook Reversal

A very painful condition suffered by pirates when they try to get dressed in the dark. Also, a situation that comes up in technical trading.

A couple basics before we get to the meat of this one. First, technical trading. This form of investment analysis uses chart patterns (the day-to-day movement of a security's or market's price) to discern what's likely to happen in the future.

Second, the hook reversal relates to candlestick charts. In these graphic presentations, the activity of a given day (or month, or whatever time period you are looking at) gets summarized in little pictures that somewhat resemble a candle.

The daily movement (or whatever time frame is the basis of the chart) has a boxy middle with little lines poking out the top and bottom. Its box part represents the open and close on the day, and the vertical line identifies highs and lows.

Okay, basics out of the way. Now, to the hook reversal. It involves a situation where the chart has been trending in one direction. A few days of a stock going up, for instance. Then, the next day, the stock basically holds steady...a sideways move. Except...that sideways move has a lower high than the previous day, and also a higher low.

So it looks like two candles sitting next to each other, but the candle on the left is bigger than the one on the right. It's base is a little lower and its top is a little higher. The smaller candle has a lower high (top is lower) and a higher low (bottom is higher).

The hook reversal is a sign that the trend could reverse. The stock that has been going up might change direction and start going down.