Two Examples of Liquidation and Reversal

The pattern annotated below can be a regular occurrence when the daily is locked in a "super-grinder" auction higher (Even though the two examples are not entirely perfect.). If you don't know what structure this term implies, look at the current daily bar chart from now back to December 21, 2011. The young auction starts with elongated green bars and then morphs into a low volatility, grind higher that respects short-term moving averages. (Our current auction is almost two months in duration.)

The previous two super-grinder auctions were from 9-1-10 to 11-5-10 (Two months long.) and 12-1-10 to 2-18-11 (About two and 1/2 months.) If you notice, both of these auctions started with elongated green bars, just like our current super-grinder.

A long liquidation event is a fast paced, elongated, quick push lower. It usually prints after an extended period of balancing. The key is that it's fast and usually scary, but it does not breach any major levels that invalidate the grind (Usually a short-term moving average.)

After the liquidation event, if the following session does not breach the prior session lows and quickly moves higher(Usually forming excess tail), the setup is to expect a trend day higher. Weak hands have been washed out and once again inventory is out of balance to the upside, as insatiable buyers responsively buy.