Reversals are a useful technical tool that can help inform which way the wind is blowing for buyers and sellers. Commvault stock just happened to recently show examples of both upside reversals and a downside reversal. Here's how we handled the trade from a swing-trading perspective.
Stock Market Corrections Impact Bases
Commvault Systems carved out a base, along with many other stocks, during this recent stock market correction from February to April. A lot of double bottoms formed where the middle of the W (full base not shown in attached chart) landed in March (1) and creates the eventual buy point. The second leg undercut happened in April (2) and acts as a final shakeout.
Commvault stock powered back above its moving averages and right when it got up to its buy point around 174.58, it paused (3). This was right around the time that the Nasdaq composite and S&P 500 both paused right below their 200-day lines before crossing above them.
Over the last couple weeks, the stock market indexes had another pause and this ended up forming handles on a lot of bases. Commvault was no exception with a handle getting tacked on after pausing in mid-May (4).
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Upside Reversals In Commvault Stock Gave Buy Opportunities
What's an upside reversal? When a stock is in a corrective phase and starts undercutting the lows of the last few days that starts the setup. After sellers have taken out levels of support, if buyers come in and push the stock up to close near the top of its range, that's your upside reversal.
Upside reversals are great during corrections as they act as an early indicator that the tide may be turning, at least in the short term. The good news is that you can often get in at a lower price than a traditional buy point. It's also easier to manage risk. If you undercut the lows of the reversal day, the reversal has failed. The day can still finish at a loss, but if it closes high in its range it still counts as a reversal.
For Commvault stock, the multiple upside reversals (5) right around its 21-day line were an indication that buyers were at the ready to pick up shares. Commvault joined SwingTrader on May 30, a strong reversal that also saw indexes show dramatic upside reversals of their own (6). As usual, we started locking in profits into strength as we got between 0.5 to a full ATR of profit (7).
Downside Reversals Are Not To Be Ignored
There is the dark side of reversals and that is downside reversals. When buyers can't keep a stock at highs and the sellers take control to push it to the lows of the day, that's a downside reversal. Especially when you see a wide spread between the high and low, it means buyers surrendered to the sellers. Commvault stock saw its own downside reversal this week (8). We actually started selling near the top of the day on strength and then exited the remainder after the stock reversed sharply to protect our profits.
While a downside reversal doesn't mean a stock move is over, it can signal weakness on a short-term basis. Since swing trading is focused on short-term trading, we take downside reversals seriously. Often we'll step out of the way of the sellers and wait for a new opportunity.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
