Chapter 16
Counting the Legs of Trends and Trading Ranges
Trends often have two legs. If the momentum on the first leg after the reversal is strong, both the bulls and the bears will wonder if it will be the first of possibly many legs, creating a new trend. Because of this, both bulls and bears will expect that a test of the old trend's extreme will fail and the with-trend (with the old trend) traders will be quick to exit. For example, if there is a strong move up after a protracted bear trend, and this up move goes above the moving average and above the last lower high of the bear trend and contains many bull trend bars, both the bulls and the bears will assume that there will be a test of the low that will hold above the bear low. Once the momentum of this first up leg wanes, bulls will take partial or full profits and bears will short, just in case the bears are able to maintain control of the market. The bears are not certain if their trend is over and will be willing to initiate new short positions. The market will work down since buyers will be reluctant to buy until there is more bullish price action. As bulls come back in on the pullback that is testing the low, the new bears will be quick to exit because they don't want to take a loss on the trade. The buying by the bears covering their shorts will add to the upward pressure. The market will then form a higher low. The bears will not consider shorting again unless this leg falters near the top of the first up leg (a ...
