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Video 8D, slide 17 - Bear Breakout
I was a bit confused while studying slide 17.
Al is explaining how good the bear breakout is, with four consecutive bear bars and good follow-through.
However, when I look to the left, I see a 14-bar bull micro channel (that means bulls were strong and buying aggressively, right?). Despite the good-looking, consecutive bear bars, wouldn't the bear breakout more likely to become a Breakout pullback instead of a bear trend?
Thanks for the support!
The 14-bars bull micro channel that you saw can also be a buy climax that represent exhaustion.
One thing I understand from Al's teachings is that one thing can be many things at the same time. Therefore, the 14-bars can be a strong bull trend that got continuation, or it can be an exhaustion at the end of the bull swing.
We are not fortune tellers, so we can't know for sure, but what we can do is to analyse the price action as more bars are being printed.
At first, as you said, it could very well be a breakout pullback, so we expect a pullback buy setup such asa H2 or Wedge. There was outside up bull bar double bottom buy setup, and double bottom is a H2. It's reasonable to buy with stop above that bar, but it did not trigger. Instead, the market went down, broke bellow the bottom of the double bottom, so it's a failed double bottom. Then, it started printing consecutive bear bars. Now it's clear we're in always in short, and we should be looking for short.
At this point, it's very likely that we would be going lower. However, as I said, we're not fortune tellers. There are still chances that it would just reverse up. However, considering the information we gathered from the printed bars, it's good odd to bet that we would be going lower.
Your question is the same I had for a long time while studying how to trade.
On top of what Buffalo said, I'd like to share my 2 cents in this topic.
Everytime you see big consecutive bars after a good swing in the same direction, you have to consider the possibility of an exhaustive move. In the slide you mentioned, after 10 consecutive bull bars, the bulls were able to make another 3 bars that were bigger than any other bar to left. And that is a big alert for anyone who is considering entering a long position, because that might just be bears giving up and stepping out until price gets to a good resistence, where they could start selling again.
Does that mean you should sell those bull bars? Absolutelly not. But that means you should be really careful to buy them.
If those 3 bars happened in a different context, for example, right after a Breakout Mode, it would be a much better scenario for a long, because that probably would mean that the bulls had just taken control of the market. In the slide 17 example, however, that seems to be more the case of bears giving up than bulls taking even more control of the market.
Another point is: if bulls were so eager to keep buying, do you think they would allow a 4 consecutive bear breakout (with zero tails on top - that usually means urgency) after an 8-bar pullback? Probably not.
Those points reinforce the hypothesis of an exhaustive move by the bulls.
And a last point, but equally important:
wouldn't the bear breakout more likely to become a Breakout pullback instead of a bear trend?
Absolutely! And a key point here is: likely.
However, after those 4 bear bars, the market entered Always in Short and you could expect at least another leg down. Does that mean the market was in a bear trend? No. It means that if you were looking to buy, you should wait for that bear momentum to dissipate.
I know these concepts might sound too subjective, but that's the beauty of PA.
I hope these points help you in some way.
Good question. I agree with the previous two comments.
I also sense that you may be thinking about predicting the future, maybe in a somewhat formulaic way? (Perhaps you are rather loss averse?).
Better, I think, to take the swing entries as they arise using the Brooks stop-order swing entry method, if your assessment of the traders equation is attractive to you. In the chart you refer to, a double bottom buy setup would have disuaded me from taking a sell setup after the top, but that did not happen till much later.
What you are saying is correct. It is a Pullback following a bull microchannel. So for an actual reversal of the overall market, you will likely need some major trend reversal top. Here we got a Lower High Major trend reversal (about 20 bars after the bear Breakout Al references). On a smaller time frame, this bear Pullback is a bear trend (all pullbacks are trends on a smaller time frame).
What Al is trying to explain is that after 4 CC bear bars following a tight bear channel after consecutive buy climaxes (14 bar bull micro channel), the odds favor the 2nd leg down from the bear breakout (red boxes). Al is saying that traders will sell the breakout betting on at least a 2nd leg down (red and orange boxes) so bulls will sell and look to buy lower and bears will sell betting on the second leg down. The most important thing to remember is that a successful breakout does not mean trend, it just means a 2nd leg following the breakout, and that 2nd leg might just be a few bars. Notice the 3 consecutive boxes following the orange boxes, notice how it had a small 2nd leg that was only one bar.
I agree with this as well. The more important thing to understand is that bulls will step aside after the 4 consecutive bear bars and wait for the selling pressure to weaken. Aggressive bears will sell though but they will be quick to exit short here.
Brad, after watching the lesson over and over again, I realized that's exactly what AI said. He never said the market had reversed into a strong bear trend, he simply meant that a 2nd leg was very likely after those bear bars.
Thank you, I really appreciate your time to help me
Thank you Water Buffalo, Bruno, Graeme and Brad. You guys really helped me on this.
I wish you all a happy new year!