Day 8: The mighty ducks V-formation

Spring is always a fun time. The emergence of a fresh beginning full of colour and light emerges from the cold, dreary winter shadows. That’s how a new bull trend feels to me, after a robust bearish deconstruction.

My best setups, one the ones I dig through a lot of trash for, are setups where signs show a start of a new bullish trend. I love watching the technical reverse, and psychology transfer from the bear camp to the bullish one.

What we are looking at here is the start of a bull trend: a classic rounding of the bottom, a “V” type formation.

There are often three stages to a good rounded bottom.

The last of the bears still trying to take prices down
  • The first phase – is where we still see a lot of bears still taking price down. We can see a lot of strong bearish candles, and if we squint, we can see a bearish shadow cover all the bullish action within this range. I find it a bit odd to see some of those strong bullish candles within this region. I chalk it up to bullish recoil after all the excessive selling. Also, it could be some traders looking for a taste that a bottoming effect may be on the horizon.
If we squint, there’s a black shadow covers the bullish activity in the region.
  • The next, second phase – this is the actual flip as bears join the bull side. Between June 2010 to early 2011, we can see the resistance, and upper boundary limiting the highs. Within this range, we can see how the lows go from going lower to creating higher lows.  

At the tail end of August 2010, we can see a clear divide where psychology and investing starts shifting towards the bullish side, as the candles start getting stronger and dominant.

A divide creates a barrier between the bears and bulls, and shows the transition.

If I draw the divider between the two regions, we see the strong bearish presence to the left of the divider, and the slow change over to the bull side on the right-hand side. It took a few weeks for the bears to accept the shift: we can see this with the indecisive candlesticks which immediately follow the divider. While slightly bullish, the upper and lower shadows are far more dominant than the razor-thin white bodies. The bears took a final stab in driving price lower, but couldn’t sustain the coup. The bulls took over soon after.

Let’s look at the actual bottom in mid-August, when we get the inflection point where the tide reverses from bears to bulls. I like analyzing inflection points because there is so much story going on behind the scenes. Let’s dive in.

The long, strong bearish and bullish candlesticks:  There are two dominant candlesticks at the bottom, a bearish and bullish, both long and strong-bodied. 

But the story is in the shadows. We’ve seen candlesticks with shadows before, but what makes these particular bars interesting are the shadows are equal in length to the bodies. The bearish candlestick, for example, had a long upper shadow. Even though a bearish bias, the bulls had driven prices higher (above the open). But their efforts were squashed as the bears took back the gains, and drove prices lower.  

The same story accompanies the bullish candlestick a couple bars after the bearish one. During the period, the bears had driven prices lower. The bulls reversed their efforts and overpowered the move to the upside.  

While strong candles, check out the shadows!

Volume spikes! What makes a firm bottom is the volume associated with the bars. We can see how volume was fairly average before the August bars. Volume spikes considerably during the bottoming candles, but then, goes following, goes back lower. While I like to see volume pick up after the bottom (which it doesn’t here), the base is still accompanied by unusual activity.

Volume spikes associated with each of the bars

Besides the large candlesticks and volume spikes with them, the compelling story for me is this small teeny tiny candle sandwiched between the two solid-bodied candles. (You probably glazed right over it, I know I did). Take a look at some of what was happening behind the scenes:

Did you miss this little guy? I did! But this is the real story within the reversal

The tiny body compared to the lower shadow: The body is small, with price only moving about ten to fifteen cents. But the lower shadow tail was three times as wide. While the bulls overall won over this period, this was the exact period where the bears gave up the drive lower, and buyers started coming into the game.  

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