The 1 a.m. breakout bar study

PART 2

At the end of this downtrend, the market produces a 1 a.m. break down bar that signals the end of the downtrend. The three breakdown bars show decreasing volume on each bar, illustrating a decreasing amount of selling pressure each time. The first breakdown is the highest quality in terms of spread and volume. It is proceeded by a complete lack of buying pressure.

The second breakdown bar is able to make good progress beneath its preceding range, but it shows just a tiny bit more buying than the first breakdown bar and is proceeded by an actual attempt to push higher. That rally attempt is immediately thwarted, but it is visible in its ability to push up and the fact that there is a lot of volume. That’s different, it’s a slight change of character.

The final breakdown bar shows the narrowest spread and lowest volume, the least commitment from supply. Not only does this one bar show less downside extension, the down wave within the bear channel shows shortening of the thrust (loss of momentum). Shortening of the thrust in the channel illustrates either a lack of selling pressure or a presence of demand. In this case, because the volume is decreasing, it shows a decreasing interest in this market - a lack of selling pressure.

A relatively low supply will leave the market susceptible to reversal when demand shows up.