Author: Lee TG | Publish date: Mon, 24 Jan 13:49 | >> Read article in Blog website
This lesson details Supply and Demand as seen through Volume Spread Analysis when SM tests the market. These tests amount to discovering Supply/Demand and the "footprints" of SM through Tom Williams's (TW) Low Volume Rule. This is all taken out-of-context of the background (trends, timeframes, s/r, etc.) which was the subject of earlier lessons.
Understanding and Recognizing the Market Forces of Supply and Demand
Markets move off of the imbalance of supply and demand. This is what VSA identifies so clearly on a chart: An imbalance of supply and the market has to fall; an imbalance of demand and the market has to rise.
Here it's turned around to see how the market moves on No Demand or No Supply. There are two Low-Volume Tests SM uses before turning a market that are somewhat easy to spot.
The first test here illustrates weakness before a bearish move, that is, weakness in an uptrend ("weakness appears on up bars" TW).
No Demand Bar: a narrow spread UpBar with low volume that Closes in the lower half of the price-bar.
The No Demand Bar shows there is very little activity from the SM. It is this "no demand" from SM that causes a market to reverse on the tops. The low volume shows that their participation is limited in the up move because they know the market is weak. Their campaign will include giving the move an extra nudge to clear any stops. In the end, triggering stops is a very profitable manouver for them. This is one of the times they will trade away from the true value of the market to cause confusion - then panic - when the market turns.
Those traders who were anticipating the top and took short positions with stops in that area are forced to cover away from the true value then get them back at a lower price. At this time, the news is talking up the bull market day - if the reporters haven't done it on their own, there is always an analyst (manipulating SM) calling in.
This is the opposite of what retail traders asume. The Edge for SM is their confidence and deep pockets. They can risk a large amount of money during their campaigns to rake in huge gains during the Mark-Up or Mark-Down phase.
Before SM can start an uptrend they must remove supply from the market - accumulate. The supply they have accumulated is intended to be distributed at higher and higher prices during the Mark Up Phase. If they start the Mark Up Phase before supply has been removed, it could cost them substantially (in time and money) when hidden or unforeseen supply shows up. They might also lose their edge for creating panic in the retail sector - in this case greed: the fear of losing out during the up move. The No Supply Bar test is an essential tactic in SM's campaign to turn the trend up.
They say that it is the exception that proves the rule, and there is an exception to this one. This is one reason rigid mathematical rules run into trouble. The market is dynamic, showing the action of human traders, but it still shows logic. Once the logic is recognised the confusion disappears.
If there is a low volume up day on the very first day of any break-out from a genuine accumulation area, the result is often a rapid one day up move from the accumulation area on low volume. This is NOT a sign of weakness. The wide spread up and out on the first day from a genuine accumulation area on low volume is caused bya shortage of stock. In accumulating stock, as we saw earlier, the trading syndicates would have removed most of the supply that is available at those price levels. This low volume up move out of an accumulation area is therefore an indication of strength. The difference is that you will have a buying phase during the previous few days or bars, not signs of weakness. Most up moves on low volume are a sign of weakness. However, try to recognize the reasons. Genuine no demand, or low volume up-day/bar, always has market weakness in the background which the professional money has seen.
Admittedly easy to identify in hindsight bar by bar. The important point is to keep in mind is that all the indications of weakness must have been there in the first place, as the market was unfolding day by day. You will no doubt have difficulties in analysing a chart as it unfolds bar by bar until you have trained your mind to think like a predator rather than run and act with the Herd. Practically all these up bars on this chart will be accompanied with 'good news' of some sort. If there is no good news available the news media will simply make it up to explain away the sudden up move taken place on any particular day. Your subconscious mind will be busy absorbing this information whether you like it or not and forming an opinion. To the untrained mind that view will be bullish, therefore you will not have even noticed volume implications telling you otherwise.
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