Exhaustion Bar Chart Pattern (Bullish)
An Exhaustion Bar (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion followed by reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.
Exhaustion Bars can develop after a rapid up or down move. They are a form of key reversal, but differ sufficiently enough to warrant their own category.
Exhaustion Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of an Exhaustion Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down as in this case, then upon identification of an Exhaustion Bar, taking a long position or closing a short position is recommended.
Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Exhaustion Bar.
The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.
The price opens with a large gap in the direction of the then-prevailing trend.
The bar is extremely wide relative to the previous bars.
The opening price develops in the lower half of the bar in a downtrend and in the upper half in an uptrend.
The closing price should be both above the opening price and in the top half of the bar in a downtrend and in the lower half and below the opening in an uptrend.
The bar is completed with a gap to the left still in place.
Look for heavy volume to indicate temporary inbound trend climax.
The presence of an Exhaustion Bar usually warns of a reversal of psychology. With a large opening gap, we are seeing the results of extreme sentiment, but as the wide trading range eats up a large part of the opening gap, and the bar ends with the gap almost closed, we have a strong indication of a sentiment reversal from bearish to bullish.
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