Wave Personality & Sentiment · Lesson 2 of 6

Wave 2. The Bear is Back.

Wave 2 is the most psychologically demanding wave of the impulse. After W1\'s quiet advance, W2 retraces deeply (often 50 to 78 percent). To the crowd, this confirms what they always believed: the downtrend resumes. Bears regain confidence. Longs from W1 get shaken out. News flow returns to the recession narrative. The trap is that W2 cannot break below the W1 low - if it does, the entire bullish count is invalid. The phase where consensus is most wrong is the phase right before W3.

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Figure II
The deep retracement that confirms bears
Wave Personality
Wave 1
The First Move
Skeptical

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Rule violated: Wave 4 cannot enter Wave 1's territory
50% Fib 61.8% Fib W2 typically retraces 50 to 78 percent of W1. The depth tests but does not break the W1 starting low. SENTIMENT: BEAR RELIEF - "I told you so" mentality - Bears regain confidence - W1 longs panic-sell - "Rally was fake" narrative During W2, bears feel validated. The W2 retracement is mistaken for a continuation of the original downtrend. "See, that bounce WAS a dead cat" - post-W1 vindication headlines "Back to lows expected, bears in control" - mid-W2 analyst commentary "Recession deepens, new lows likely" - macro fear flares back News during W2 sounds like a continuation of the bear market. The narrative confirms what the crowd already believed. W2: declining volume on dip - spike at W2 low = capitulation W2 has corrective volume: declining as the dip progresses, often spiking at the low (panic capitulation of W1 longs). SHORT STOP CROWD BEHAVIOR: - Late bears re-enter shorts - W1 longs panic-sell at the lows - Smart money: adds at the retest W2 traps late bears who short into the dip - and shakes out early longs at the very moment W3 prepares to launch. CRITICAL RULE: INVALIDATION W2 must NOT close below the W1 start. If it does, the bullish count is invalid. - still in the downtrend, not Wave 2. Invalidation floor The W1-low is the hard floor. A close below invalidates the count and means we are still in the original downtrend. W2 personality: bears feel validated, longs get shaken out, the W1-low holds. The pause before W3 explodes higher. 1 2 3 4 5
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The Pattern Begins

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