Monthly Reversal: An In - Depth Analysis of Key Stock Investment Strategies

Definition

The monthly reversal is a technical analysis strategy that focuses on the changes in the monthly - level price trends of stocks. It aims to identify the key turning points when the stock price shifts from the bottom consolidation area to an upward - trending phase. When a stock exhibits specific morphological changes on the monthly chart, such as breaking through a long - term downward trend line, getting out of the bottom sideways - trading range accompanied by an increase in trading volume, a monthly reversal signal may be formed. This signal indicates that the supply - demand relationship of the stock has shifted in favor of the bulls, and market expectations for the stock are starting to improve. It is a strong indication that the stock price is about to enter an upward channel.

Calculation Method

  • RPS Indicator Screening: The RPS (Relative Price Strength) indicator is a crucial foundation of this method. It is used to measure the relative performance of a stock compared to the overall market over a specific period. Usually, the RPS value is calculated based on the past 250 trading days (about one year). The formula is: RPS = 100 - 100*(1 + Stock Increase)/(1 + Market Increase of the Corresponding Sector). In the monthly reversal strategy, stocks with an RPS value above 80 are preferentially selected. This means that the stock has outperformed 80% of the stocks in the market in the past year, reflecting its relatively strong market position.
  • Moving Average Conditions: Moving averages are referred to for judging the stock's trend. When, on the monthly level, the closing price of a stock is greater than 0.85 times the highest price in the past 120 days and greater than 0.75 times the highest price in the past 250 days, it indicates that the stock price has broken through important resistance levels, showing upward momentum. At the same time, if the 10 - month moving average is in an upward trend, it provides strong support for the stock price's rise. This moving - average arrangement reflects that the stock shows a positive upward trend in both the medium - short and long - term.
  • Trading Volume Requirements: Trading volume plays a key role in the monthly reversal. The trading volume on the day of the monthly reversal should be more than 1.5 times the average trading volume in the past 50 days and greater than the average trading volume in the past 10 days. The increase in trading volume indicates a large influx of funds, increased market attention to the stock, enhanced power to drive the stock price up, and increased the credibility of the monthly reversal signal.

Applications of the Monthly Reversal

  • Stock Selection: In the process of stock selection, the monthly reversal is a powerful tool for screening potential stocks. Investors can focus on stocks with large upward potential by screening for those that show monthly reversal signals. After these stocks complete the reversal, they often attract more market capital and start an upward - trending market.
  • Trend Judgment: By observing the monthly reversal pattern and subsequent price movements, investors can effectively judge the long - term trend of a stock. If a stock successfully achieves a monthly reversal and, after the reversal, the stock price steadily climbs along the monthly upward channel, and each pullback is supported at important monthly support levels, it indicates that the stock is in a strong upward trend. Conversely, if the stock price fails to hold steady after the monthly reversal and drops back to the consolidation range before the reversal, it may mean that the reversal has failed, and the stock may remain in a volatile state or enter a downward trend.
  • Risk Control: The monthly reversal strategy helps investors control risks. When a stock does not show a monthly reversal signal or breaks below a key support level after the reversal, investors should be cautious. For stocks that have not reversed yet, their prices may continue to hover at the bottom or even decline. And for stocks that break below the support level after the reversal, it is likely to herald a new round of decline. At this time, investors can choose to avoid these stocks or stop losses in a timely manner to avoid greater losses.
  • Portfolio Management:: When constructing an investment portfolio, including stocks that have experienced a monthly reversal can enhance the overall performance of the portfolio. Stocks from different industries and with different market capitalizations, after experiencing a monthly reversal, bring diversified sources of returns to the portfolio.

Advantages and Disadvantages of Monthly Reversal

  • Advantages
    1. Accurate Trend Capture: Focusing on the monthly - level price trends, the monthly reversal can effectively capture the long - term trend changes of stocks, helping investors seize major market opportunities. Compared with short - term indicators such as daily - line indicators, the monthly reversal signal is more stable, reducing the interference from short - term fluctuations and enabling investors to more accurately judge the long - term direction of stocks.
    2. In Line with Market Essence: The monthly reversal reflects the long - term changes in the supply - demand relationship of the stock market. When a monthly reversal occurs, it means long - term capital inflows and changes in market expectations. Such signals based on the market essence have a relatively high reliability.
    3. Wide Applicability: Whether they are large - cap blue - chip stocks or small - and medium - cap growth stocks, the monthly reversal strategy can be applied for analysis. Stocks of different sizes and in different industries may have opportunities for monthly reversals during their development, and investors can select corresponding stocks according to their risk preferences and investment goals.
  • Disadvantages
    1. Signal Lag: The monthly reversal signal usually appears after the stock price has already changed to a certain extent. This means that investors may not be able to enter the market at the first moment when the stock price starts to rise, missing part of the early gains. For example, in the initial stage of a rapid stock price increase, the monthly reversal pattern may not be fully formed, and investors may have to wait until the monthly reversal pattern is confirmed before entering the market, resulting in relatively high costs.
    2. Dependence on Market Environment:: The effectiveness of the monthly reversal signal varies in different market environments. In a bull market, with the overall upward movement of the market, the monthly reversal signal may appear more frequently, and the success rate is relatively high. However, in a bear market or a volatile market, with unclear market trends, the reliability of the monthly reversal signal will decrease, and false signals are likely to appear, misleading investors.
    3. Limitations of a Single Strategy: Relying solely on the monthly reversal strategy for investment has certain risks. Stock prices are affected by many factors, such as macro - economic policies and changes in company fundamentals. If investors only focus on the monthly reversal pattern and ignore other important factors, they may make wrong investment decisions.

Stocks Selected by the Website Based on the Monthly Reversal Strategy

Based on the monthly reversal strategy, the website updates the trading data of US market, HK market and CN matket daily and calculates the daily stock - selection results after the market closes.