That about parallels what has been happening in Greece the last few days.  The problem with bank runs is (ironically like Spanish Bull runs) once they start, they do not stop.  If Bankia goes, expect further panic and selling across the board while the USD gains.

Speaking of the EUR, it is at the yearly lows and the price action is looking set to break the 1.2630 either tomorrow or early next week.  Meanwhile, the EURJPY is close to breaking the 100 figure which is its lowest level since early Feb.

In other markets, the DOW lost 156pts or 1.24%, the S&P 19pts or 1.51% while Gold surged $38 likely because investors recognizing the bad Philly Fed print = QE3.

GBPUSD – Forms Inside Bar Trading Strategy
Taking a beating more so then its neighbor the Euro, the GBPUSD has sold off 15 of the last 17 4hr candles (60 of the last 68hrs) while forming a brief consolidation at the support level of 1.5900 just recently.  Today, after a brief pause at the round number of 1.5800, the pair formed an inside bar strategy which has now broken lower.   If the pair can break below 1.5768 (resistance 3x back in Dec. 2011 and support 1x in Mar. 2012) by the early London trading, the pair could easily fall to 1.5687 to close out the week as it has been the worst performer against the USD over the last 3 days.  I will look to sell any rallies up to 1.5900 should this price action inside bar setup not continue lower.

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This has only increased the risk of an all-out banking collapse in Greece which would mean minimally more panic and likely a default on their loans since the banks cannot pay any of the loans back.

Adding fuel to the fire was Draghi who said the ECB will stop funding operations for some Greek Banks (read veiled threat and no funding support if you do not participate in our austerity program).  He continued that he had a strong preference if Greece stays in the EZ, but they will not compromise on its principles to prevent an exit.

You can translate this as Draghi saying you have the green light to leave if you cannot meet our terms which is highly doubtful they can.

This did not help markets at all and we immediately saw the EURUSD dump 30pips in a matter of minutes.

But what happened next has been supporting our recent theory which we wrote yesterday in our forex price action commentary, that the EURUSD and other majors are forming a short term bottoming structure which is showing up on the intraday charts of 1hr and under.   We’ll talk about this further in the next section but the Euro, Aussie, Kiwi and cable are all holding the line which is a first for them in some time.

As for the global markets, the DOW lost 35pts or .26%, Oil dropped to just under $93 a barrel and the other big loser lately – Gold hit its lowest price since Dec. last year.

EURUSD – Showing Short Term Bottoming Formation
Although we do not think this will last long as any more bad news out of Greece, Italy, Spain or anything in Europe will send this pair back down, we are seeing across the board how all the majors are showing signs of bottoming in the near term.  After the exhaustion price action selling we talked about yesterday, price has formed a bullish pin bar off the intraday lows, then traded sideways with 4 of the last 5 4hr bars closing bullish suggesting a strong tug of war going on down here.

We suspect the market is going to bounce a little before sellers come back in on any rallies, perhaps the dynamic resistance and the 20ema. We will look to sell at the dynamic resistance above, along with the 1.2812 level and look for price action triggers here.

Take a look at how the AUDUSD and NZDUSD are showing similar attempts to bottom on the 1hr charts

AUDUSD Forms Pin Bar Rejection Off Lows

Same with the NZDUSD Forming A Bullish Pin Bar Setup

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As a result, the EURUSD shed over 140pips on the day hitting a 4-mos low and is approaching the yearly lows just above 1.2630.  A breach of here would send technical models reeling and likely trigger both stops and a fresh wave of selling.

Gold continues to feel it as well hitting 4.5mos lows and is approaching the critical Dec. 30, 2011 swing lows at $1522. Should this get breached, then the next layer of support would be $1486 and $1432.  Keep in mind gold has climbed for 11yrs straight so a correction is well over due.

Global markets also followed suit from Europe to the US with every major index selling off.  The Dow ended down 63pts while the S&P lost  .57%.

EURUSD – Looking Over-Extended
Although I do not like buying this pair unless you held a knife to my throat, I am feeling like the pair is over-extended at the moment.  It has sold off 11 of the last 12 days with the last two days being quite aggressive in the selling forming a marubozu followed by another aggressive selling day.  The 4hr chart shows possible exhaustion price action selling so I prefer to sell rallies then trade the breaks lower.

I am looking at a possible pullback to the 1.2812 region as my most aggressive location to sell any rally which would be nice if it met up with the dynamic resistance and 20ema.  Pending the right price action trigger, I would consider a short on a pullback here.  My next level up to sell would be 1.2900 but I am viewing any rallies as an opportunity to sell targeting 1.2650 which is the yearly lows and an eventual break lower.

For those wanting to learn rule based price action systems, access to the traders forum, lifetime membership & more, check out my Forex Price Action Course.

Upcoming Economic Announcements:

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In fact, the last time the EURUSD saw this price was mid-Jan. this year and we do not see downside pressure abating much.  Adding salt to the wound was EZ industrial production falling in March which means the hopium policy makers in Europe have been selling about the recession being mild are far from reality (nothing to see here, move along).

Global stocks along with the Euro all took a hit as the worries for a Greek exit are increasing with contingency plans being made out of Germany helping to fuel the rumor-mill.  The DOW lost over 125pts or 1% and the S&P shed 1.11% or 15pts.  Virtually every index from Asia to the US saw red except for the Nikkei which was the only one to close positive on the day (albeit 20pts – woohoo!).

We also forgot to mention Merkel’s conservative party took a crushing defeat on the elections this Sunday which only makes things more complicated for the austerity package.  Expect Greece, Spain and the Brady Bunch of players in Europe to dominate the headlines and price action near term.  All eyes will be on Greece for if they exit, then most likely, all hell will brake loose with the losses being far worse then anyone expects.

EURUSD – Gap Not Filled, Runaway Train?
Over the weekend, the EURUSD gapped down and has not even come close to filling it, selling off for now 8+ consecutive 4hr candles.  Although we do not see downside pressure abating much, this is quite a lot of consecutive 4hr candles to close bearish and approaching the historical maximum of 10.  Could it break this all time max?  Certainly, and now would be the most likely time.  However, we do not want to chase the trend at this moment and prefer to trade pullbacks.

Thus, we are looking for price action pullbacks to the dynamic resistance and 20ema on the 4hr chart which has held price below it since May 2nd.  Unless some silver bullet comes out to save Europe (which we don’t see) or Greece does a 180 and decides to keep the debt-slavery going (I mean austerity package terms), then we expect any and all rallies to be opportunities to sell the pair for an eventual break of 1.2821 and the medium term target of 1.2650 or the 2012 yearly lows.

For those wanting to learn rule based price action systems, access to the traders forum, lifetime membership & more, check out my Forex Price Action Course.

Upcoming Economic Announcements:

Make sure to check out my newest article on Do You Have the Willpower to Trade Forex Successfully?

The question is;
Do you believe willpower (and specifically – your willpower) is a limited resource, and if so, what do you think it limits you to learn, achieve and accomplish?  

A follow up question to this is:
If you work on a difficult task, say learning to trade price action, will you need more energy and resources to accomplish an even harder task, especially one involving self-control, such as using proper risk-management, trading with discipline, following your rule-based systems or trading plan, etc.?

Take a moment to reflect on these questions, then write down the answers.

Before we get into the answers, we are going to talk about a recent experiment on doing difficult tasks and the Stroop test.

There has been a lot of testing on willpower lately and the general experiments went like this;
People were asked the question about willpower, how they felt about their willpower and what they could achieve and accomplish.

Their answers were noted and then divided into two groups, and then they were all given the same following two tasks.

They started off with an easy task which was to read a page of written text and cross out all the instances where they saw the letters ‘es‘ together.

Then they were given another page of written text where they started off crossing out all the instances where the letter ‘e‘ showed up, then midway, had to change to crossing out every ‘e‘ except when it was followed by another vowel.  The second task was obviously more difficult then the first because they had already learned to cross out the ‘es‘ in the first version of the task, then cross out all the ‘e‘s regardless of how they occurred.

The reason why the last task was most difficult was a) the task was more specific, and much more importantly b) they had to prevent themselves from doing a behavior they had already built up a habit to perform.

After doing this set of tasks, they had to perform a ‘Stroop test‘.  This is one test I do every day in my Lumosity training whereby you read various names of colors in a word on the left, and have to determine if the color on the right word matches up with the color on the left.

For example, you would see the following two words;
Yellow and then the word Red which would be colored any of the following possibilities (yellow, red, blue, green, black).
If the word on the left was yellow, but the word on the right, say ‘Red’ was colored red, blue, green, or black, you would have to quickly determine if they matched up or not (in this case not).  If the word on the left was ‘yellow’ and the word on the right ‘red’ was actually colored yellow, then you selected ‘yes’, if not, you selected ‘no’ which is the Stroop test.  

Here is the interesting part.

If the person’s response to the willpower questions (the same ones I started the article with) was they believed they had a limited willpower to accomplish any task they wanted to achieve, these people made far more mistakes on the harder tasks, especially the Stroop test, then those who believed they had unlimited willpower to achieve anything they set their minds out to.  Even more importantly, those that believed they got energy from doing the more difficult tasks, tended to outperform those that felt taxed from them.

Why?

The answer lies in ego-depletion, which is whereby those who think their willpower can be used up based on the tasks they are doing on a regular basis.  What this led to was a person having less access to their natural intelligence and resources, whereby doing one difficult task (especially a self-control one…i.e. trading, money management, following a trading plan, etc.) made it harder to do the second task which was more difficult and required more self-control.

In contrast, those who believed willpower is essentially unlimited did equally well regardless of the letter crossing task (easier or harder).  They were not affected by this feeling of ego-depletion and therefore had the same amount of resources available for the easy or harder tasks.

Now one additional study was done in this experiment, which was to train people through various statements to either a) believe that ‘working on a strenuous task can make you feel tired and less able to accomplish more difficult tasks later or b) believe that working on a strenuous mental task can make you feel energized for further challenging activities.

These groups did the same tests (letter crossing, Stroop) as the first groups, and the results were as followed;
-The group that was taught to believe through statements that willpower is limited and they will need a break, or more energy to complete the more difficult task, performed much more poorly on the Stroop test after performing the most difficult letter crossing task

-On the other hand, the group trained to think willpower is unlimited, and that they will gain energy from each difficult task they accomplish, did just as well on the Stroop test regardless of whether they had an easy or difficult letter crossing task before.

So what does all this mean for you?

A simple translation is your beliefs about your own willpower is one critical factor that affects how effective your willpower will be, especially in trading, keeping to your money management, following a trading plan, being disciplined, patient, etc.

But more specifically, the more you believe your willpower can keep you from doing the things that you don’t want to do (write in your trade journal, keep using proper money management after a large series of wins or losses, etc), the more likely you will be to us your willpower successfully in trading.

Although positive statements are necessary, they are not sufficient by themselves.  Only until you take the proper actions will those statements, beliefs and ideas start to change the grey matter in your brain, and construct the proper neural connections to trade successfully.

The good thing is if you currently have limiting beliefs about your willpower which are interfering with your trading process, whether you trade price action, or the ichimoku cloud, or whatever system you use, it does not matter.  You can train your mind to build this willpower and relate to the difficult task of learning to trade successfully.  That means almost every single person, with the right training, practice and diligence can learn the proper skills to trade successfully.

While it is true some people will have more natural abilities that will help them in their process, almost everyone can learn to trade successfully with the right effort, the right training and the right mindset.

In an upcoming webinar in about a month, I will talk about various methods to re-program your mind to remove those limiting beliefs which inhibit you in trading and cause you to repeat the same patterns again and again (in trading and in life).

Until then, stay tuned, but I welcome your comments and thoughts on this post.

Kind Regards,
Chris Capre
2ndSkiesForex.com
Facebook: 2ndSkiesForex

Other Related Articles:
5 Mantras for The Developing Forex Trader
Your Brain, Trading and Finding The Zone
The Mindset of A Successful Forex Trader

Quite a shock though just hit the markets around NY Close was the out of nowhere announcement from JP Morgan which held an unscheduled call the CIO unit has significant mark-t0-market losses in its synthetic credit portfolio.  Here are a few highlights from the statement but they can be best summed up as ugly, painful, and downright scary for the TBTF bank:

-JPM WOULD NEED $971M ADDED COLLATERAL IF RATINGS CUT ONE-NOTCH
-JPM WOULD NEED $1.7B ADDED COLLATERAL IF RATINGS CUT 2 NOTCHES (and what about 3 notches???)
-As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion

Translation:  JPM has just taken $2B in trading losses from the guy who was moving the entire market (Bruce Iskill) in the past 6 weeks (ooops) and could face an additional $1B depending upon how this plays out (not including any credit downgrades which would hammer them further).  Needless to say, the market did not respond kindly and Bruce no longer has a job.  But…there is a likely book deal in the future for him, so there is a bright side .

In after hours trading, the stock is down 6.7% with the S&P down 7pts.  The other losers were the AUDUSD and NZDUSD which lost 50 and 30pips in what would normally be a very quiet transition from NY to the NZ and AUD opens.  This should put additional downside pressure on the two likely for the Tokyo session.

Tomorrow should be a volatile day with a slew of announcements in China, Europe, the UK and US so don’t expect it to be a tame one tomorrow.

AUDUSD Forms Intraday Pin Bar Off Dynamic Resistance
After bottoming a day and a half ago from a pin bar setup, the AUDUSD offered a forex pin bar strategy after rejecting off the dynamic resistance (20ema) on the 4hr chart today.  Many of our price action traders got in on this one so hopefully you did as well as it is well into profit yielding already more than a 2:1 reward to risk play.  The pair has touched the support base where the first pullback started so we will watch for price action triggers here and a possible short term buy, but are overall bearish on the pair and will be looking to sell rallies up to 1.0224 for an eventual break and close below parity which we see in the near future.

GBPUSD – Pin Bar Setup Plays Out
The GBPUSD pin bar setup we posted in yesterday’s forex price action setups gave us a nice pullback into the 1.6100 level offering up a 2:1 reward to risk play.  Even now, if you still are in it, you’d be up in profit. Now the market is looking a little shaky with a wide range bar and we are already out of it.  However, if the intraday charts show some timidness in the pullback, we will consider another possible buy looking for price action triggers on the 1hr and 4hr time frames.

For those wanting to learn rule based price action systems, access to the traders forum, lifetime membership & more, check out my Forex Price Action Course.

Upcoming Economic Announcements:

Make sure to check out my latest article called Price Action Forex Trading – Exhaustion & Climax Reversal Bars 

Why?

Because the hinges are starting to fall off as we have been writing about for months.  As Nigel Farage (UKIP) at the European Parliament today, “The EU Titanic has not hit the iceberg”.  We actually felt like that weeks ago, but now its starting to accelerate.

Why?

Well, today, the Bank of Spain formally Nationalized Bankia (remember that bank formed to consolidate the operations of the regional banks?) with total assets in €328.B.  They were the 3rd largest lender in Spain but the largest holder of real estate assets (toxic).  The funny thing is, the Bank of Spain tried to pawn it off as solvent.  ”Nothing to see here, move along….these are not the droids you are looking for.”

Meanwhile in the EU, the Eurozone will hold back €1B in funds which was supposed to go to Greece over worries the gov’t would not go along with the austerity plan. This will all continue to put fear the EU will breakup and minimally Greece will exit failing to keep the terms of the plan which means massive losses to both European and US banks.  Just remember, Greece is really the cover up for the bigger problem, Spain and Italy which are far larger.

On the other side of the pond,  the DOW has had its longest losing streak in 10mos, back in July last year. What happened the last time the DOW lost 6 days in a row? It dropped 2500 pts in less than 3 weeks so we could be seeing the start of a major implosion here.   Economic announcements are heavy tomorrow with the BOE rate decision, along with a few other reports so tomorrow should be a dousy.

EURUSD –  First Daily Close Below 1.3000 in 3+ mos
For the first time since Jan., the Euro had a daily close below the 1.3000 barrier.  Keep in mind this is with a friendly sovereign buyer called the Chinese who have been propping this pair up (likely along with the FED).  This will activate a lot of technical models and trigger some stops so we only see bearish pressure short and medium term to continue.  We like either a breakout pullback setup at the key aforementioned level, or a retest of the dynamic resistance and 20ema around 1.3100 now so both options work for us.

It may be a bit oversold, but we cannot see buyers being excited about being long this pair, save some magic bullet which we do not think exists, so scratch that, we are sellers at this point looking to play either option but watch for price action triggers at either level.  We think medium term the pair is now headed towards the 2012 lows just above 1.2600.

GBPUSD – Pin Bars off Dynamic Support
Two for one deal today on the trade setups as the GBPUSD has sold off 7 of the last 8 days to land itself on the 20ema.  It did so in handsome fashion forming a pin bar setup off the dynamic support and daily 20ema which also happens to be a key support level and swing high from April this year.  Watch for price action triggers on the 4hr and 1hr charts for this to possibly offer a buy signal back towards 1.6200 and possibly 1.6275.

For those wanting to learn rule based price action systems, access to the traders forum, lifetime membership & more, check out my Forex Price Action Course.

Upcoming Economic Announcements:

Make sure to check out my latest article called Price Action Forex Trading – Exhaustion & Climax Reversal Bars 

The key was the statement from the Greek Left Coalition leadery saying the country which started western civilization was about the pull the plug on it as the deal with the EU and IMF was null and void.

This sent markets diving with Gold, Silver and the EURUSD getting hammered within seconds.  Gold lost over $30 within a matter of hours while the EURUSD dropped about 45pips in less than an hour and the Dow shed almost 100pts in the same time.  The Dow has now lost ground for the 5th day in a row.

Meanwhile, the new French head of state (Hollande) suggested his approach would be centered more on growth and this left people feeling the French may bail on the German partnership they have been working on.

Overall, this should put continual pressure on the EURUSD which has sold off now for 7 days straight.  We advocate selling on any short-covering rallies up to 1.3130 for an eventual move towards the 2012 lows around 1.2650.  We will also keep our eyes out for a breakout pullback setup on the next daily close below 1.3000 which has not happened since late Jan. this year.  Keep in mind, there is only one piece of reasonable German data tomorrow to lift the pair (German Trade balance) so the excuses well will be running on fumes tomorrow, save Greece doing a 180 and openly embracing the austerity plan.

We do have a light economic calendar tomorrow so any news outside of Greece and France should dominate the airwaves and shot term sentiment.

We would like to ask one question though, which is;
Greece has voted in both neo-nazi members and old-communist members to its parliament.  So in the attempts to fix the situation, save its country and economy, they chose to elect members from two failed systems of gov’t?  Who thought of this plan?

Silver – Holds Trendline But Bearish Pressure Remains
Failing to bounce solidly from any reversal signal and hold onto gains, the shiny metal has come under increasing pressure as of late suffering along with gold today giving up a major support level closing below $30.  The metal did bounce off a trendline in play since mid-feb. this year but until it can break and hold above the daily 20ema and dynamic resistance, we will look to sell rallies as we do not see any buyers willing to come in till minimally $28.55.  Below here, we can see the precious metal possibly returning to the 2011 lows at $26.05 before buyers feel enthusiastic about scooping up silver on the cheap.  Until then, we will wait for price action triggers to sell on rallies or until we see a major change in the price action structure medium term.  It should be noted since the yearly highs at $37, silver has sold off 30 of the last 50 days or 60% of all the trading days since the end of Feb. till today.

For those wanting to learn rule based price action systems, access to the traders forum, lifetime membership & more, check out my Forex Price Action Course.

Upcoming Economic Announcements:

Make sure to check out my latest article called Price Action Forex Trading – Exhaustion & Climax Reversal Bars 

The main driver was the Greek elections with the main parties failing which is now creating doubt they will maintain their membership in the program, either by a) leaving on their own will or b) not keeping the agreements of the bailout.

At the current rate, Greece will run out of cash by end of June if it doesn’t get the gov’t with the program to receive the next tranche.

Then France changed parties with Sarkozy losing the re-election bid, and considering he was Germany’s main ally, which could possibly cause a) France pulling their support for the continued bailout and b) a German led austerity package which may not remain popular for long.

The result was global markets got hammered across the board with the DOW selling off 29pts or .23% and the FTSE losign 111.49pts or 1.92% on the day.  Asian markets dropped over 2.5% across the Hang Sang and Nikkei.

Obviously the Euro got punished gapping down on the open losing 125pips and the 1.3000 handle before regaining the figure to close above it for the day.  This was either China stepping in to defend the key level which they have admitted to in the past, but regardless, the pair looks vulnerable and we cannot imagine traders getting excited about holding Euros near term.

It should be noted the economic calendar is a little light tomorrow so technical trading should dominate price action moves.

EURUSD – Forms Pin Bar off 1.3000 Figure
After getting hammered from the EZ elections last weekend, the EUR/USD formed a daily pin bar off the 1.3000 big figure telling us there is some downside support.  We suspect this was either technically driven or Chinese buying to defend the level.  Although the pair has sold off for 6 days in a row which may seem like a lot, the pair has not reached over-sold territory as the selling has not been overly impulsive.  The 1.3000 floor has held price for a while as no close has happened below it since early Jan. this year which suggests likely manipulation at work as the pair should not have been contained in a virtual 400pip range for over three months now.

If the intraday price action pulls back towards 1.3000 and looks timid at best, then perhaps the level will hold short term and offer a possible buy targeting 1.3100 and 1.3150 near term.  However, we will look to sell rallies, perhaps into the dynamic resistance above in the 20ema so watch for price action triggers here as the pair has formed a series of two LL’s (lower lows) suggesting the technical structure is attempting to turn over.

Another Notable:
We would also like to note the Dow index formed a pin bar setup on the 4hr time frame after closing the gap so this could setup a possible short term trading opportunity.

For those wanting to learn rule based price action systems, access to the traders forum, lifetime membership & more, check out my Forex Price Action Course.

Upcoming Economic Announcements:

Make sure to check out my latest article called Price Action Forex Trading – Exhaustion & Climax Reversal Bars 

Before I get into today’s article which will be an expansion and amplification of this, to recap – the key things you want to be looking for in spotting these exhaustion and climax reversal bars are;

1) a bar that is much larger than the previous price action and ideally the largest bar in the move
2) it occurs at/near a key support or resistance level, or after breaking a key support/resistance level
3) it occurs after several bars have been trending in an impulsive fashion in one direction

Although there are other many subtle clues you can look for to amplify the possibility of these climax and exhaustion reversal bars, these are the three main ones you want to see in the price action to look for a trading opportunity.

The goal of this article will be to demonstrate a recent example of this, how you can trade these price action setups and what to look for from a price action perspective.

I will begin with an example of this in the DOW which gave a really good signal just the other day using this method.  Then I will get into the anatomy from a price action perspective all the key characteristics to identify these bars.  After this, I will discuss how you can trade these using price action with some simple rule based methods.

I will begin starting with the daily chart for the year in the DOW, the general uptrend, how it found a key resistance, and then look into the 4hr time frame to show how price action reacted after breaking the key level.

The DOW Hits Key Resistance

In the chart below, notice how price has a very stable relationship to the 20ema and dynamic support.  It rejects off of it three times before finally breaking below it.  But when it eventually does, it quickly jumps back above it, telling us buyers are still interested in driving this pair higher being happy to scoop this up on pullbacks.

Price action then forms a triple top just shy of 13300 which is the first time the entire year it needed three attempts to break a key level, suggesting there is possibly over-extension in the trend along with some sellers who are willing to hold a line the bulls cannot penetrate.

In the next chart below, starting with the top left of the chart, we can see how each pullback from the triple top (save the last one) created a pin bar off the 20ema (bars 1 and 2).  This was suggesting the buyers were happy to get back in on the pullback, but still could not break the key resistance just shy of 13300. Price then sold off aggressively for the first time all year, dropping over 500pts in about 6 days.

After finding support at a prior pullback level, price resumed the uptrend.  Notice how as it came up to the resistance level that formed the triple top, it formed a doji and inside bar suggesting hesitation for two bars in a row.

If the inside bar had formed after a strong bull bar, it would have suggested a little more strength and possible breakout.  But the hesitation from the day before, combined with the inside bar communicated two days of hesitation and an inability of the bulls to take out a key level.

Now on the next day, price does break above the key level forming a new high. But this ends up failing intraday, then pulls back below the resistance level along with producing a range bar.

One should notice how the rejection to the topside is equal to the downside suggesting false break as a) price failed to hold the gains, and b) there is an equal balance between the buyers and sellers.  Ideally, we’d have a very strong imbalance between the buyers and sellers when looking for a breakout, but we are not seeing that in the chart below.

Anatomy From a Price Action Perspective of Exhaustion/Climax Bars

Now that we have highlighted a potential area of contention, I am going to zoom into the 4hr chart to show the exhaustion or climax bar specifically, break down the anatomy of it from a price action perspective and then talk about how you can trade this setup.

Beginning with the next chart, the first bar to concentrate on (which should naturally stand out) is bar 1 – the breakout bar which is the largest bar in the entire series.  Up to this point, we can see consistent buying all the way up to the resistance level with the bulls dominating price action winning 25 out of the 36 candles (69% bull-bear ratio) up to the breakout bar which is bar 1.

Now if you remember from the very beginning of the article, an exhaustion or climax bar will generally mark long or over-extended trends.  These bars should have the following characteristics;

a) the largest bar in the series
b) occur near key support/resistance level or on the break of one
c) occur after several bars have 

Why do these bars tend to be so large?  

When trends are over-extended, they have had a lot of time to attract various players into the market, with the institutional players being first, the more advanced players who sniff out the new trend second, and the retail traders third.  The retail traders tend to be last as a whole because they need the greatest confirmation to enter a trend (generally).

By the end of a trend, as the retail traders get in, you have the greatest imbalance between buyers and sellers.  Those who have not profited from the trend will often chase it feeling like they have to make money on this move by buying breakouts instead of pullbacks.  Additionally, the institutional players will try one last push to get as much out of the market as they can – thus producing a climax or exhaustion bar.

Sometimes, this has an additional purpose of not just squeezing out the most of the current trend, but trapping new traders long into the market so when they exit, they can also look at reversing the market using those trapped to fuel the upcoming sell-off.

This is why these bars tend to be larger than usual and the largest in the series.  They will also occur at key levels, especially on breakouts which helps to further trap traders who bought on the break.  So hopefully this explains the basic anatomy of these moves.

Now getting back to the chart,  if price action had maintained the breakout and held above the key resistance level, along with extending the gains, then it would communicate the breakout will continue.  But look at the next bar (bar 2) and how price action responded.  Notice how it immediately reversed back below the resistance level which was definitely a warning sign the breakout could not hold the gains.

In these circumstances, you have to ask yourself;
if the bulls were in control, how come they could not extend the gains?
Where did they go?
How come such a strong bar did not extend price further?
Why did sellers immediately push back?
Why did the resistance level not hold as a breakout pullback level?  

All of these questions should have immediately come into mind because they held the key to whether this was a legitimate breakout or a false break.

But even if you did not ask all these questions, all the ingredients for the exhaustion or climax bar was in play telling you this was likely the end of the move.  Even after bar 2, notice how price then treated the resistance level not as support (continuation) but as resistance (false breakout).  Again, go back to the questions and the breakout just doesn’t add up.  So we have a textbook example of an exhaustion or climax bar.

How To Trade This Price Action Setup

Usually in an uptrend, I’ll look for a second attempt at the key level or a LH (lower high) before attempting to reverse a strong trend.  If I see a really good price action trigger, such as a pin bar, engulfing bar or outside bar, then I’ll consider taking it in combination with the exhaustion or climax bar.

But there will often be a second failed attempt either at the key level, or producing the lower high giving you the final confirmation the exhaustion bar is in place and it is time to reverse.

Depending upon which of these situations will present itself will determine how I get in, but if I see any of them and they have all the ingredients, then I’m going to sell that looking for the market to reverse heavily since the trend has become over-extended.  Either it will retrace a good portion of the move, or it will consolidate before making a new leg (up or down).

Now looking at the chart below, although we had in bar 2 a solid bear bar, it barely took out 50% of the gains in the exhaustion bar.  Generally I’d want to see 60+% of the prior bars gains taken out before feeling like the bears are mounting a good attack and thus look for a reversal.  If I fail to see this minimum push-back, I will stand aside and wait for another trigger.

Even though this threshold was absent, if you notice bars 3, 4 and 5, they all were being held in check by the level which was the key breakout level, suggesting the market was using this as resistance.  If it was a trap, price would not have made its way to the 20ema (so far away) nor kept producing small candles below this level (should have been above the level).  However, none of these were in place.

The most aggressive entry would be to sell after candle 3 or 4 closed.

Why?

They were weak candles after a strong selling candle just below resistance telling us the buyers were not pushing back with enthusiasm.  This would be one way to get in to this with a stop minimally above the highs of these candles and possible higher.

Another entry would have been to sell below the low of candle 3, or on a close below candle 3 with a stop above the high of candle 5 if it had made a break above the resistance level (which it did in this case, but will not always be the case).

The advantage of selling below the low of bar 4, or on a close below bar 4, is at this point, any traders who are trapped long are starting to exit their longs as the losses are starting to mount and increase since they are below their entry.  If candle 5 does not have a wick above the breakout level, then the stop has to go above the level minimally, but better to have it above bars 3-5 or possibly higher.

One conservative entry would be to wait for a breakout pullback to the 20ema treating it as resistance (not support) suggesting a new relationship to the 20ema.  There are also a few other methods to get into these reversal bars, but these are a few which should give you a good start to trade these setups on exhaustion or climax bars.

In Summary

The goal of this article was to demonstrate from a price action perspective how exhaustion or climax bars can and will often represent the end of a trend and what key characteristics you will want to find in these bars.  We went over a really good example of this in the DOW showing how all the ingredients were present, what to look for and how you could identify them.  Then we ended by giving you a few methods to trade these price action setups and find either an aggressive or conservative entry along with what to look for.

I hope you enjoyed this article and found it useful in helping to identify exhaustion and climax bars and how to trade them.

Please make sure to comment, along with sharing the article by liking and tweeting it to pass it on.

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Kind Regards,
Chris Capre
2ndSkiesForex.com
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