CHAPTER 2
Signs of Strength in a Reversal
Strong reversals have essentially the same characteristics of any strong move, like a strong breakout or a strong trend. Here are a number of characteristics that are common in strong bull reversals:
- There is a strong bull reversal bar with a large bull trend body and small tails or no tails.
- The next two or three bars also have bull bodies that are at least the average size of the recent bull and bear bodies.
- The spike grows to five to 10 bars without pulling back for more than a bar or so, and it reverses many bars, swing highs, and bear flags of the prior bear trend.
- One or more bars in the spike have a low that is at or just one tick below the close of the prior bar.
- One or more bars in the spike have an open that is above the close of the prior bar.
- One or more bars in the spike have a close on the high of the bar or just one tick below its high.
- The overall context makes a reversal likely, like a higher low or lower low test of the bear low after a strong break above the bear trend line.
- The first or second bar of the breakout has a close that is above the highs of many prior bars.
- The first pullback occurs only after three or more bars.
- The first pullback lasts only one or two bars, and it follows a bar that is not a strong bear reversal bar.
- The first pullback does not hit a breakeven stop (the entry price).
- The spike goes very far and breaks several resistance levels like the moving average, prior swing highs, and trend lines, ...
