Jesse Livermore's Spikes and One-day Reversals

Jesse Livermore was very wary of any aberration in the price or volume of a stock that he was tracking. Sometimes, the price would spike, accompanied by abnormally heavy volume of at least a 50 percent increase over the average daily volume. This often led to what he named One-Day Reversals or trading climaxes. They often were like a red flag warning of a change of trend.

An aberration to him was any strong deviation from what was normal for the stock. He considered a spike in the stock price, high volume, as well as low volume, all aberrations, deviations from the norm. To him, these were possible danger signals, and often signals to exit a trade.

These spikes are often a reflection of exhaustion in the stock’s momentum, and they often appear at the end of a move, like a last gasp. They can provide a terrific signal for the observant, savvy trader.

A One-Day Reversal occurs when the high of the day is higher than the high of the previous day, but the close of the day is below the close of the previous day, and the volume of the current day is higher than the volume of the previous day.

It was Livermore’s belief that if you had the patience to sit with the stock all during its rise, now after the one-day reversal pattern appears you must have the courage to do the right thing and acknowledge this danger signal. You must now consider selling the stock, because you have received a valid warning signal.