What do I love most about momentum trades?

There’re a couple of things, but their tendency to move far without looking back may well come out on top!

But as you’re well aware, most radical up moves eventually turn into extreme slides.

Spotting a top is a tough job, and I don’t even try it.

But here’s one way to go about it that may help you manage your long positions and enter the short ones:


What are Exhaustion Candles?

Some of the most decisive moves in the market happen for a relatively simple reason – people on the other side get stubborn.

In case of an up move, it’s the short traders and their unwillingness to admit they’re wrong that leads to blowout short squeezes.

So, what happens when too many traders at once get too caught up?

What happens when the stock is at levels so extreme, that they just can’t take it any longer?

Traders call it the “max pain” area, or a place where people on the wrong side are so exhausted, both mentally and financially, that they just want to get it over with, no matter the price!

And this is exactly where you can shop for an exhaustion candle!

Exhaustion Candles are defined by two key characteristics:

  1. Outlier Volume
  2. Outlier Move

In simple terms, an exhaustion candle is the place where the other side gives up.

And once that happens, the demand drops and the momentum is often finally ready to steam.

Let me show you what I’m talking about:


Exhaustion Candles in Practice

Let’s travel back in time and see how one of the “memest” meme stocks played out.

Here’s the AMC Entertainment (AMC) chart right as the initial up move was developing:

And here’s that same chart, but just a few days later:

Are you seeing anything “outlier”?

I bet you do!

On January 27th, the stock opened MASSIVELY up, forcing a covering of great magnitude – 1.25B shares traded that day vs 450M the day before.

The shorts have definitely capitulated.

Now that the demand from them was gone, the stock was finally ready to let go and put in a top (for a few months, at least).

If you were looking to trade the reversal – there really was no better spot before or after.

Here’s Bed Bath and Beyond (BBBY), if you don’t believe me:

Are you seeing any similar price action?

I got some more for you, here’s Beyond Meat (BYND):

Note, how an exhaustion candle that could’ve helped you spot both a bottom and a top!


How To Trade One

Look, they may look easy, but trust me – as with all things trading, they’re not.

What makes them especially tricky – you only spot one, after it happens.

You should never try to anticipate an exhaustion candle – you’ll just become one of the stubborn reasons why they occur in the first place.

The good news for you is – once they do occur, there’s often a great amount of meat still left on the bone.

Just look at the charts above – you could’ve shorted in the second, third or fourth day post exhaustion and still had a clean level to trade against with plenty of opportunity to act.

I often talk about seeing a setup develop – well, for once, forget about it.


Let the exhaustion candle come to you!

Apart from basic discipline and patience, you might want to set up the scanners alerting you to outsized moves on outlier volume.


Jason Bond

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