The 1 a.m. breakout bar study

Part Four

The 1 a.m. bar under consideration is marked by the purple arrow. Leading up to this bar, the market has been in the context of a downtrend, illustrated with the red bear channel. A quick visual inspection will review low quality rallies (narrow spreads and lower volumes that make minimal progress) coupled with strong down bars with strong volume that push price lower (breaking supports and pushing through many foregoing lows and closes in one fell swoop).

The preceding day shows wide down bar on very high volume that breaks a support. It’s an interesting bar because it contains a lot of buying in addition to all that selling. The market is able to push over the previous swing high before reversing to close weak, breaking below the last thirteen bars of support. However, because there was so much buying, that huge spread only managed to extend a relatively small amount to the downside below the support level. About 75% of the bar actually resides above support.

That down bar is proceeded by two no demand bars which are unable to even test new resistance before the market breaks lower, seemingly in a hurry to become oversold. Those no demand bars are broken by the 1 a.m. breakdown bar. Of all the wider spread break down bars, this one has the lowest volume, illustrating the lowest commitment to continuation of the trend. Incidentally, it even represents ease of movement as the volume about doubles over the preceding bar (which has extremely low volume anyway) but shows a spread that is about four times greater. It shows there’s about half as much buying present in order to allow so much distance to be traveled on that volume.

Remember, low volume and ease of movement are susceptible to reversal especially when they occur late in a trend or in an area where high volume may be required to produce a result.

The demand line of the bull channel comes near to the support zone which involves a major weekly support. The demand line is a natural place for sellers to begin taking profits. The support zone is a natural place for buyers to re-emerge. And that’s exactly what happens. The 5 a.m. bar shows bullish effort versus result in the demand confluence and shortening of the thrust. The 9 a.m. bar shows an inability to make downside progress despite the increasing volume (buying). Then the market quiets down, showing no ability to sell through support.

Hidden buying emerged, supply decreased, all in a demand confluence. Buying picked up overnight and then it was off to the races.