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Hello.
Al always talks about exhaustion, but I can't understand it. Why is an exhaustion bar strong if "exhaustion" is supposed to be something weak. What are buyers and sellers thinking and doing when an exhaustion bar is forming or what leads to it forming with strength?
Both vacuum tests and exhaustion / climaxes are caused by strong hands withholding limit orders.
In the example of an exhaustive end of a bull trend, if only weak bulls are left to buy (by definition using relatively small sizes because of their modest accounts) then all strong bears have to do to create an end-of-trend climax is to withdraw the offers temporarily. As all the big offers disappear, a relatively small amount of buying from weak bulls at the market would now create a relatively big bull bar.
Once strong bears feel all the weak bulls are in the market and there's nobody left to hit their offers, they sell heavily (they also sold quietly all the way up). At this point the strong bulls are not buying, so the bid side should be thin. Any reasonable selling at the market by strong bears would create the first breakout of the new bear trend. Weak bulls would panic and sell at the market, adding fuel to fire.
This is a simplistic picture. Of course the bull trend may never have a climax, we may have a big trading range or an endless pullback, etc, etc.
I’ve been having some confusion with respect to exhaustion gaps - AL says that price breaking out of a 20+ bar channel - with big bars imply exhaustion - what i have observed is that many a times the 20+ bar channel is as good as a TR ie - it is a broad channel which is generally sandwiched in a trading range - so my observation is that it is not a good idea to seek for an exhaustion gap if the channel breaks with strong candles. any experienced traders out there to give their opinions please?
