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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?
Hi Erik,
I think there's a few reasons for exhaustion bars looking big:
1) Weak bulls and weak bears. Let's say it's a bull trend for >20 bars already with very few pullbacks. Weak bulls were unable to get a good entry the whole move and finally can't stand it anymore and FOMO in just as the supply of buyers is running out. On the other hand, weak bears who sold low are unable to hold short any longer and take losses. Both of them acting together adds a boost to the upside (where strong bulls take profits and strong bears initiate new positions).
2) Vacuum effect: as the market approaches tops/bottom of TR, one side steps aside an anticipation of entering at a better price. For example, in a bull move that's approaching top of TR, bears may step aside near the highs knowing that price will probably test higher. This lack of bears selling and bulls still buying may cause a big bar.
Hoping for others to add more ideas about this interesting topic.
Cheers,
CH
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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?
