Price Action: Trading Tight Bear Channels (Part 4)

If a channel is not particularly tight,
sometimes bulls will buy at lows and add at lower levels.
I think a very important thing to watch is:
whether bulls can make money.
If bulls have difficulty making money,
you should not go long — only go short.

The market broke through a series of bear bars,
then a pullback appeared.
Once the pullback begins,
the market enters the channel phase.
That is, first there is a strong breakout, then a pullback,
then a channel. Although it is very, very tight here,
on a higher time frame this is a breakout.

Every time price makes a new low, bears start partial profit-taking —
partial profit-taking, partial profit-taking —
and this causes pullbacks.
Inexperienced bulls buy above all these bars
and keep losing money.
They buy because the risk is small,
and beginners only consider risk,
not probability.

When the channel is tight,
every reversal is very likely a minor reversal.
You must assume
that every reversal is a minor reversal,
even the first strong reversal may be only a minor reversal.
What bulls need is a "major trend reversal" —
a retest of the low
followed by an upward reversal from there.

If you eventually see a strong minor reversal,
then bulls will start looking for swing rally opportunities.
Every bear trend is constantly forming wedge bottoms,
and every bull trend is constantly forming wedge tops.
But a wedge bottom does not mean the reversal is necessarily a major reversal.
When the wedge is small and the channel is tight,
it is only a minor reversal
that will lead to lower prices.
With every new low,
you can redraw a new wedge.

Every breakout evolves into a channel,
and every channel eventually evolves into a trading range.
Sometimes,
when the market begins to enter a trading range,
even while still in a very tight bear channel,
bulls will start buying at new lows and adding to positions.
Because once pullbacks start getting bigger and more frequent,
the market will very likely soon enter a trading range.
If it enters a trading range,
bulls can make money by buying low, selling high, and adding on dips.

The first thing I look at is: can limit-order bulls make money?
If they add below the prior bar and all get trapped,
then I know the market will most likely continue to fall,
and I only consider going short.