What is 'Outside Reversal'

An outside reversal is a price chart pattern that reveals when a security’s high and low prices for the day exceed the high and low of the previous day’s trading session. Outside reversal is also known as a bullish engulfing or bearish engulfing pattern when using candlestick charts.

BREAKING DOWN 'Outside Reversal'

Outside reversal is a two-day chart pattern that shows when a candle or bar on a candlestick or bar chart falls “outside” of the previous day’s candle or bar. This chart pattern is commonly employed by technical analysts who seek to uncover bullish or bearish market reversals. An outside reversal pattern is typically one of the most precise candlestick patterns; however, they do not appear as often as other patterns. As such, it can be best to use outside reversal patterns in conjunction with other technical indicators or chart patterns.

On occasion, traders see volume or support and resistance levels as a way to corroborate the outside reversal. For example, a stock price that undergoes a bearish outside reversal when it approaches trend-line resistance on high bearish volume is considerably more reliable than a stock that is moving sideways and has a bearish outside reversal on lower-than-average volume.

Bullish Outside Reversal

A bullish outside reversal, also called a bullish engulfing, happens when the second candle is a move higher. For instance, a stock may make a small move lower on the first day, then open even lower than the prior day, but rally sharply higher by the end of the second day. The indication is that bears had control over the market, but then bulls took over and overwhelmed them, signifying a change in the prevailing trend.

A chart depicting a bullish outside reversal

In the chart above, Amazon.com Inc. (AMZN​) shares appeared to be consolidating before a bullish outside reversal marked a renewal of the uptrend. Its stock price continued to rise the subsequent days as the trend reversal took hold.

Bearish Outside Reversal

A bearish outside reversal, also called a bearish engulfing, transpires when the second candle is a move lower. For instance, a stock may have a small move higher on the first day, climb even higher the second day, but then sharply decline by the second day’s end. This demonstrates that the bulls had control over the market before the bears took the reins in a meaningful way, signaling a shift in the overall trend.

A chart depicting an example of a bearish outside reversal

The stock price of Cisco Systems Inc. (CSCO​) rose for three consecutive days before a bearish outside reversal. Share prices plunged the day after the outside reversal as the overall trend did an about-face.

The Bottom Line

Outside reversals are two-day chart patterns in which a second day’s security price lands “outside” of the prior day’s price range. These reversals can be deemed bullish or bearish depending on the direction of a chart’s second candle or bar. Traders should be mindful of these chart patterns; they are among the most reliable, although in practice they do not happen as often as other chart patterns. Thus, traders should consider outside reversals in conjunction with other technical indicators and chart patterns to increase their chances of success.

  1. Reversal

    A reversal is a change in the direction of a price trend, which ...
  2. Three Outside Up/Down

    The three outside up and three outside down are three-candle ...
  3. Morning Star

    A morning star is a bullish candlestick pattern in a stock's ...
  4. Matching Low

    The matching low is a two-candle bullish reversal pattern that ...
  5. Ladder Bottom/Top

    The ladder bottom and ladder top are five-candle reversal chart ...
  6. Unique Three River

    The unique three river is a candlestick chart pattern that predicts ...
Related Articles
  1. Investing

    Tales From The Trenches: Location Is Everything

    When a candle pattern re-occurs near a moving average, it may indicate future support or resistance.
  2. Trading

    Candlestick Charting: What Is It?

    Learn how to read a candlestick chart, as well as spot candlestick patterns that aid in analyzing price direction.
  3. Trading

    Introduction to Technical Analysis Price Patterns

    How to recognize price patterns that are key to technical analysis.
  4. Trading

    Retracement or Reversal: Know the Difference

    Learn to distinguish between a temporary price change and a long-term trend reversal.
  5. Trading

    Most Commonly Used Forex Chart Patterns

    Greatly improve your forex trading by learning these commonly used forex chart patterns that provide entries, stops and profit targets.
  6. Trading

    The S&P 500 is starting to look bearish

    After creating a bearish candle last Friday, the S&P 500 is now vulnerable to a downside move.
  7. IPF - Mortgage

    Protect Yourself Against Reverse Mortgage Scams

    You could lose not only money, but also your home if you fall for these reverse mortgage schemes.
  8. Trading

    3 Charts Suggesting It Is Time to Buy Commodities

    Given bullish chart patterns and clear trading signals, the final months of 2017 could be prime time to buy commodities.
  1. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ... Read Answer >>
  2. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly. Read Answer >>
  3. What Are the Different Types of Reverse Mortgages?

    Discover the three different types of reverse mortgages available to homeowners aged 62 and older. Read Answer >>
  4. What do the different colored candlesticks mean?

    A typical candlestick chart is composed of a series of bars, known as candles, which vary in height and color. Read Answer >>
  5. How do traders interpret a Dragonfly Doji pattern?

    Read about a rare but significant candlestick chart pattern: the dragonfly doji. Learn what a dragonfly doji says about a ... Read Answer >>
Trading Center