Day 9: The Failed Recoil

I like seeing basing patterns after intense bearish activity. And boy were the bears putting in that work in the downdraft! Up till the low point in November 2008, there was just a single white candle. It’s no surprise that there’s a robust recoil soon after, that slightly alleviates the bearish pressure. But the soothing is short, as the bears reconvene in early 2009, to take reverse the move and take price back down. 

But take a closer look at the bullish recoil. Did the bulls do anything at all? On paper, it looks like it lasts a few bars. But take a look at the full move – the entire bullish move from the October bottom to late December 2008 top barely covers the whole bearish candle

Finally, some bullish recoil after a strong bear takedown

While the bullish move between November 2008 to early 2009 gives a little bit of a glimmer of hope that the bulls were trying to turn things around, the bears shortchanged the move at the start of 2009.

Unlike the bearish wave prior to October 2008, the next bearish wave in early 2009 has hints of bullish sentiment; many of the dark bars have upper and lower shadows on them.

Nonetheless, the strong bearish candle that cuts through the $14 support level in March 2009, also cuts the bullish hope of a bounce.

Not only is the size of the bar impressive, but the surge in volume adds to the magnitude of the bar.

But, what I find surprising is the quick turnaround in the price and lack of follow-through. After such a bearish knife through the support level, the bears could only follow up with one single bar? What we wouldn’t have known at the time (but know now) is that the circle region represents the bottom of the downdraft.  

There were few clues that the bottoming reversal was taking place. While the strong bearish candles had above-average volume associated with them, the bullish engulfing candle was on light volume. 

No bullish hope left once price breaks through the support level

Soon after, we can start to see a formation forming in July 2009. I can draw support and resistance trendlines connecting the tops and bottoms of the price movement. To make things easier, I’ve circled the highs and lows, creating a very clean wedge. What I like about this wedge is a minimal amount of noise within the formation. The tops bounce cleanly off the upper resistance, and similarly, the lows bounce cleanly off the supporting trendline.

The difficulty in this formation is that the bulls are running the show like stealth-like ninjas. Even though we have a wedge, notice how price had very little volatility. Right from the last bounce in July, price ran right through the overhead resistance.

In similar patterns that I’ve seen in the past, I’ve gotten used to the idea that the bears and bulls typically create volatility near the tip, where there is a struggle over which camp will prevail. In the breakout here, there is no such contest – bulls had been running the price up since July.

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