Trading The Wyckoff Way

[DbPhoenix 42]

Anyone who wants to work on the exercise suggested two posts above is welcome to give it a shot.

 

Time is money.

 

Db

[Niko 10]

Db, thanks again for taking the time to read my comments and going through the hassle of giving the thread participants some homework, I hope I got at least the basics right.

 

Here it goes...

 

After coming out of a range in the 29th of March on increasing volume the market again entered into a congestion zone between 101 and 105.

 

By April 23rd the market was in a dead center at the middle of this trading range, it started testing resistance without a significant increase in volume, and by the end of April had reached the resistance level of this trading range without strength, which could mean an absence of selling interest and not a significant increase in buying interest.

At this time, one would have to wait for either a breakout or an increase in volume to the downside to define a possible outcome.

 

By May 1st there was a breakout on increased volume but not really significant if compared with the previous month activity, so I think it would be better to wait for confirmation to the upside.

 

On the second of may prices retreated on increased volume, which signaled the buyers had lost control of the market. This could have been an opportunity to go short, with a stop above the high of the 1st.

 

The market then fell on increasing volume breaking support on the May 4th, then stopped on May 7th at the Nov-Feb support level (not on the chart). After that the market entered a congestion area once again until forming a hinge in decreasing volume on May 11th. Then on May 12 the market broke the level of support at 95 on not very significant volume.

 

Then volume increased, but prices did not advance very much, measured by the difference between open and close, giving warning signals on the strength of the sellers, but not signaling though, strength on the buyer side. Although a small trading range formed during the 16 and the 17th of may, the buyers could not bring significant interest to the market on 92,5, that was the low of the (Nov-Feb range), this level was broken on decreased volume, this in the context can be interpreted as sellers leaving the market on its own, in order to measure the strength of buyers, a weakness sign.

 

As the market approached 90 (the top of the Aug-Nov trading range), it went again into another trading range, it formed a hinge on the 25th and then buyers tried to take control of the market but failed on the 29th losing terrain on increased volume.

 

At this point, all signals point to weakness, not justifying long commitments, but perhaps giving an opportunity to enter short on a breakout to the downside of this last trading range.

After breaking the 90 support level, the market has been going down on increased volume. By last Friday, the market had declined significantly and close near the lows, a signal of sellers keeping control of the market, this do not give promising prospects for bottom catchers as me, hehehe.

 

This signals the sellers who are already committed to stay short, and those awaiting for an opportunity to wait for the development of another congestion zone, perhaps around 82 (the midpoint of the Aug-Nov trading range), in order to define if the market is finally going to have a significant reversal, or if after another small trading range is going to keep on going down. We will have to stay alert during the week awaiting developments.

[Niko 10]

The first development of the week came in yesterday with a technical rally. Let´s see how this develops during the rest of the week.

 

[pjohnm 10]

Ignoring activity prior to what is on the chart:

 

March 5 - 28

Trading range formed with mid point of 106.5. Note the firm rejection of the lows on Mar 15, suggests strong support at 105 (pin bar + climactic volume). Does the action on Mar 26 serve as a warning to those looking for the market to rise? Lack of demand at the high as there is minimal evidence of selling interest (low volume).

 

Mar 28 - 29

Sellers see the lack of buying interest, supply increases and although buyers join in, selling pressure is the dominant force, dropping from the high of the trading range through S to new lows in just 2 days. Since Mar 26 we have had indication of a lack of buying pressure at the previous trading range high and now clear indication of strong selling pressure (large fall in price on strong volume).

Does the market continue to fall or do we get a test of S now R from below?

 

Hindsight trading options:

Long: Only if evidence of selling climax or break above March trading range

Short: A sell stop triggering below 105 with a stop just above 105 (how far above?)

Short: Wait for a breach of 105 (S) with a test of S now R from below

You could also have bought S and sold R during March

 

Mar 30 - Apr 10

S now R is tested from below. Lower high created followed by lower low. Although an apparent supply channel has formed, the action 2 days prior to the 9th and including that day indicate a lessening selling pressure (falling volume plus failure to make new low).

 

Apr 10 - Apr 24

Supply line breaks, price forms new range which shows majority of trades taking place in high of the range between 101 and 105. Buyers appear to be eating away at supply, volume gradually declines and sellers appear to be done.

 

May 1 -2

S / R at 105 breached from below. Price closes at mid-point of March trading range. I would have a long bias given the action in April and would look for an entry close to 105 with a tight stop.

 

May 3

Decisive rejection of Mar trading range. Supply enters rapidly and buyers are overwhelmed as per Mar 28/29. Long bias gone so look for short. Again options are sell stop below the April low or look for a breach followed by retrace.

 

May 4 Volume looks climactic but price closes near the lows.

 

to May 21

Price never gave sellers a chance for a retrace. Volume gradually declines and a 7 day run of lower highs ends on May 21

 

May 25 Obvious hinge (narrow price range + v low vol).

May 29 An attempt to lift price above the hinge fails miserably.

 

May 30 - Jun 1

Supply increases and selling pressure remains dominant force. Volume again looks climactic but closes near lows. Angle of descent looks like oversold condition. I would need to look at historical charts to determine where the next short op might be.

[DbPhoenix 42]

  Nikorivera said:

After coming out of a range in the 29th of March on increasing volume the market again entered into a congestion zone between 101 and 105.

 

By April 23rd the market was in a dead center at the middle of this trading range, it started testing resistance without a significant increase in volume, and by the end of April had reached the resistance level of this trading range without strength, which could mean an absence of selling interest and not a significant increase in buying interest.

 

Note that just before price exits these zones, spreads narrow, i.e., equilibrium is reached. On the whole, the mkt finds equilibrium intolerable, as one can't make money if price doesn't move (we'll ignore selling options in this application).

 

  Nikorivera said:

By May 1st there was a breakout on increased volume but not really significant if compared with the previous month activity, so I think it would be better to wait for confirmation to the upside.

 

On the second of may prices retreated on increased volume, which signaled the buyers had lost control of the market.

 

Readers should note that the immediacy of this failure is important. Note also that the failure took place at the midpoint of the March range.

 

  Nikorivera said:

This could have been an opportunity to go short, with a stop above the high of the 1st.

 

Careful. You're flirting with hindsight insight.

 

  Nikorivera said:

The market then fell on increasing volume breaking support on the May 4th, then stopped on May 7th at the Nov-Feb support level (not on the chart). After that the market entered a congestion area once again until forming a hinge in decreasing volume on May 11th. Then on May 12 the market broke the level of support at 95 on not very significant volume.

 

Not quite a hinge, but a springboard nonetheless. And volume need not be “significant”. In this case, the increase in spread may be more informative. Sellers are pushing, but they don't have to push hard since buyers aren't resisting much.

 

  Nikorivera said:

Then volume increased, but prices did not advance very much, measured by the difference between open and close, giving warning signals on the strength of the sellers, but not signaling though, strength on the buyer side. Although a small trading range formed during the 16 and the 17th of may, the buyers could not bring significant interest to the market on 92,5, that was the low of the (Nov-Feb range), this level was broken on decreased volume, this in the context can be interpreted as sellers leaving the market on its own, in order to measure the strength of buyers, a weakness sign.

 

Volume is not all that low. Buyers keep price elevated on several occasions. Sellers are not especially aggressive, but they're there, and buyers are not particularly strong, but strong enough to keep price on a steady downward course, not a plummeting one.

 

  Nikorivera said:

As the market approached 90 (the top of the Aug-Nov trading range), it went again into another trading range, it formed a hinge on the 25th and then buyers tried to take control of the market but failed on the 29th losing terrain on increased volume.

 

Another informative failure. Note the relationship between the open and close.

 

  Nikorivera said:

At this point, all signals point to weakness, not justifying long commitments, but perhaps giving an opportunity to enter short on a breakout to the downside of this last trading range.

 

After breaking the 90 support level, the market has been going down on increased volume. By last Friday, the market had declined significantly and close near the lows, a signal of sellers keeping control of the market, this do not give promising prospects for bottom catchers as me, hehehe.

 

This signals the sellers who are already committed to stay short, and those awaiting for an opportunity to wait for the development of another congestion zone, perhaps around 82 (the midpoint of the Aug-Nov trading range), in order to define if the market is finally going to have a significant reversal, or if after another small trading range is going to keep on going down. We will have to stay alert during the week awaiting developments.

 

Much better. Take care, though, to avoid hindsight insight. You're not backtesting anything here, and whatever sophistication you may be acquiring with regard to analysis may be colored by the fact that you know what's going to happen. This is next to impossible to avoid, and makes this exercise more CWS than pure practice in analytical skills. For the latter, pick some period from the past at random, in oil if you like, some period where you don't know what's going to happen in the immediate future (if after you start it begins to look familiar, pick another period and start over). Then start at the far right edge and begin this sort of exercise again. This will give you a much more accurate estimate of just how much progress you're making in this type of analysis.

 

Db

[DbPhoenix 42]

  pjohnm said:

 

March 5 - 28

Trading range formed with mid point of 106.5. Note the firm rejection of the lows on Mar 15, suggests strong support at 105 (pin bar + climactic volume). Does the action on Mar 26 serve as a warning to those looking for the market to rise? Lack of demand at the high as there is minimal evidence of selling interest (low volume).

First, understand that whatever comments I may make are within the context of Wyckoff and not whatever you may have learned elsewhere. Therefore, saying that there are no pinbars in Wyckoff or that the volume is not climactic is a clarification not a criticism.

 

Given that, you picked up on a nice detail, though I suggest that the lack of follow-through on the 27th in combination with the narrow spreads on both days provides support to whatever suspicions one might have. Much the same could be said about the 19th and 20th.

 

  pjohnm said:

Mar 28 - 29

Sellers see the lack of buying interest, supply increases and although buyers join in, selling pressure is the dominant force, dropping from the high of the trading range through S to new lows in just 2 days. Since Mar 26 we have had indication of a lack of buying pressure at the previous trading range high and now clear indication of strong selling pressure (large fall in price on strong volume).

Does the market continue to fall or do we get a test of S now R from below?

Given the increase in volume, though, buyers are giving it the old college try. Unfortunately, they're shooting blanks.

 

  pjohnm said:

Hindsight trading options:

Long: Only if evidence of selling climax or break above March trading range

Short: A sell stop triggering below 105 with a stop just above 105 (how far above?)

Short: Wait for a breach of 105 (S) with a test of S now R from below

You could also have bought S and sold R during March

Be very careful with hindsight. It can mess you up in subtle and insidious ways, particularly since it is so pervasive on message boards. See my note on this to Niko.

 

  pjohnm said:

Mar 30 - Apr 10

S now R is tested from below. Lower high created followed by lower low. Although an apparent supply channel has formed, the action 2 days prior to the 9th and including that day indicate a lessening selling pressure (falling volume plus failure to make new low).

Plus a disinterest on the part of buyers to take advantage of this situation.

 

  pjohnm said:

Apr 10 - Apr 24

Supply line breaks, price forms new range which shows majority of trades taking place in high of the range between 101 and 105. Buyers appear to be eating away at supply, volume gradually declines and sellers appear to be done.

Nice note re the supply line. Note also the increasingly tight spreads (see again my comment to Niko).

 

  pjohnm said:

May 1 -2

S / R at 105 breached from below. Price closes at mid-point of March trading range. I would have a long bias given the action in April and would look for an entry close to 105 with a tight stop.

Let the market come to you, even if you're aggressive. Consider a buystop above the high on May 1 and see if you get that breakout. If you don't, you're out. In fact, you're not even in to begin with.

 

  pjohnm said:

May 3

Decisive rejection of Mar trading range. Supply enters rapidly and buyers are overwhelmed as per Mar 28/29. Long bias gone so look for short. Again options are sell stop below the April low or look for a breach followed by retrace.

Since you didn't get your breakout on the 2nd, you'd be justified in considering a short below the low of that day. Once the cascade begins, it can be tough to find a short entry. Better to let the new short-sellers carry you along.

 

This is, of course, hindsight in this particular case, but the strategy and tactics are pretty standard. The trick is (a) seeing the failure and (b) knowing what to do with it.

 

  pjohnm said:

May 4 Volume looks climactic but price closes near the lows.

“Looks” is right. Good example of a false climax, though it is climactic.

 

  pjohnm said:

to May 21

Price never gave sellers a chance for a retrace. Volume gradually declines and a 7 day run of lower highs ends on May 21

I assume by “sellers” that you mean short-sellers.

 

  pjohnm said:

May 25 Obvious hinge (narrow price range + v low vol).

May 29 An attempt to lift price above the hinge fails miserably.

 

May 30 - Jun 1

Supply increases and selling pressure remains dominant force. Volume again looks climactic but closes near lows. Angle of descent looks like oversold condition. I would need to look at historical charts to determine where the next short op might be.

Given the angle of the trend channel, it does qualify as “oversold”, though that doesn't necessarily mean buy. It may just drift back into the channel and continue its steady decline.

 

Nice job. You've told these stories before.

 

Db

[DbPhoenix 42]

  Nikorivera said:

The first development of the week came in yesterday with a technical rally. Let´s see how this develops during the rest of the week.

 

I don't know that I would characterize this as a technical rally. If short-sellers don't start covering and buyers don't step up, it is more likely nothing more than a pause. Only the most aggressive traders (gamblers?) would enter here.

 

Db

[DbPhoenix 42]

This illustrates what I meant by my comment regarding "oversold" and "trend channel" above. I'm using a regression channel here, but same difference, and it really doesn't matter where you take your starting point: you're either "oversold" against the channel itself or oversold by being outside the channel.

 

Db

 

 

[DbPhoenix 42]

Regarding the above exercise, these may be the best learning opportunities I can think of, if for no other reason than that they are active, as opposed to sitting in some trading room or webinar listening to some guru drone on.

 

Anyone who enjoys this sort of thing is welcome to try this one (the oil "bottom" reached last August). Looking at it first glance, the entry seems like an "Oh, well, of course, just buy the retest" example, the kind one finds on those expensive DVDs. But if one has acquired the habit of reading charts left to right instead of right to left, the entry is not quite so obvious. In fact, there are at least six places where one might justifiably enter a long trade here, and all of them would fail.

 

Where are the entries?

 

Why would each fail?

 

(Technically, this belongs in Trading the Wyckoff Way, but that thread's long enough as it is).

 

Keep it Wyckoff.

 

 

Db

 

[Niko 10]

  DbPhoenix said:

If short-sellers don't start covering and buyers don't step up, it is more likely nothing more than a pause.Db

 

Db, but how do you tell the difference between a pause and a technical rally, I have understood a technical rally as the rebound after a climax, does that mean that Friday action cannot be classified as a climax?

[DbPhoenix 42]

  Nikorivera said:

Db, but how do you tell the difference between a pause and a technical rally, I have understood a technical rally as the rebound after a climax, does that mean that Friday action cannot be classified as a climax?

 

The gurus will surface like flea beetles to weigh in on this. Most will waffle enough so that they can come back later and claim that they "called it", unless it turns out to be nothing more than a feeble bounce, in which case they can call that as well. Others will go for it and make the call, which offers a 50/50 chance of being right. And if they post it on an obscure website somewhere, they can always hope that no one will notice in case the call is wrong.

 

But none of that matters. Whether or not the volume was "climactic" or whether or not the rally is "technical" is beside the point. What is more to the point to the trader is whether or not any of this is tradeable, i.e., that whatever entry is made will put the trade immediately or close to into profit and keep him there until he is safely away from his stop.

 

So begin with your terms. How do you define "climax"? How do you define "technical rally"? If you don't have actionable definitions, you won't recognize these things when you see them, if they are in fact what they appear to be.

 

Db

[DanielM 10]

I have a question ... What do you thing about support on Silver 27 USD/Oz. ??

[Tannism 10]

These periods where volume intersects price and price hangs for awhile, are they what Wyckoff calls balance or equilibrium? Places where "traders who have placed themselves in a position to be trimmed are duly trimmed"? If so, is that also the dynamics in casas?

[DbPhoenix 42]

  DanielM said:

I have a question ... What do you thing about support on Silver 27 USD/Oz. ??

 

Actually, I don't think about it at all

 

Seriously, though, if you've read this thread, what you think means more than what I think. Do you have a chart?

 

Db

[DbPhoenix 42]

  Tannism said:

These periods where volume intersects price and price hangs for awhile, are they what Wyckoff calls balance or equilibrium? Places where "traders who have placed themselves in a position to be trimmed are duly trimmed"? If so, is that also the dynamics in casas?

 

Technically, yes, equilibrium being a state in which demand and supply are in balance. More or less. But that doesn't mean that price is unchanging. It means only that it's not going anywhere with intent. Like a see-saw. It need not be perfectly level in order to be in equilibrium. It can teeter totter in perpetual motion, never going anywhere, and also be in equilibrium. That's why W considers trading ranges to illustrate a state of equilibrium. Price isn't flat-lining, but it isn't going anywhere, either.

 

As for the "cajas" (not "casas"; casas are houses ), yes, those are periods of sideways activity. However, that doesn't mean that one can't profit from them. Depends on what one wants and whether or not one understands that trading in a trading range is literally that: trading. It's not investing.

 

Keep in mind that equilibrium can last from seconds to months. One can trade it for itty bitty gains (or itty bitty losses), or one can wait for a state of disequilibrium to arrive, which is largely what Market Profile is all about.

 

For more, search the course for "equilibrium" using Ctrl+F.

 

Db

 

BTW, this equilibrium/disequilibrium thing is largely what makes springboards so useful. Price reaches a state of very temporary equilibrium for one reason or another but it's nowhere near ready to lean back and contemplate the sunset over pina coladas. It wants action. And it gets it. If one understands how illusory this temporary state of equilibrium is, he can profit handsomely.

 

Db

Edited June 6, 2012 by DbPhoenix

[DanielM 10]

  DbPhoenix said:

Actually, I don't think about it at all

 

Seriously, though, if you've read this thread, what you think means more than what I think. Do you have a chart?

 

Db

 

I have here chart of silver for example We can talk about ressistance here?? I am not sure I am beginner

[DbPhoenix 42]

  DanielM said:

I have here chart of silver for example We can talk about ressistance here?? I am not sure I am beginner

 

I'll need to see it. Can you post it?

 

Db

[pjohnm 10]

  DbPhoenix said:

Regarding the above exercise, these may be the best learning opportunities I can think of, if for no other reason than that they are active, as opposed to sitting in some trading room or webinar listening to some guru drone on.

 

Anyone who enjoys this sort of thing is welcome to try this one (the oil "bottom" reached last August). Looking at it first glance, the entry seems like an "Oh, well, of course, just buy the retest" example, the kind one finds on those expensive DVDs. But if one has acquired the habit of reading charts left to right instead of right to left, the entry is not quite so obvious. In fact, there are at least six places where one might justifiably enter a long trade here, and all of them would fail.

 

Where are the entries?

 

Why would each fail?

 

(Technically, this belongs in Trading the Wyckoff Way, but that thread's long enough as it is).

 

Keep it Wyckoff.

 

 

Db

 

 

This is a long one but there is a lot to consider (reading from left to right):

 

Aug 4th & 5th

Combined volume over the 2 days looks like a potential climax and a technical rally appears on the 5th. An entry could be made if you can get near the climax lows. That opportunity comes on the 8th but the stop loss would be triggered.

 

Aug 9th

Another pot'l climax, price closes above the opening following tech rally. Same drill as before.

 

Aug 10th

Selling pressure checked and 80 has the look of a support level, maybe this can be viewed as a test of 80. (Price does not give an opportunity to enter near the climax low). Perhaps there is an opportunity to enter long above the highs of the 9th & 10th, given that sellers appear to be unable to take price lower.

 

Aug 12 - 17

The area of interest now is the mid point of the rally from 100 down to 76. The daily price range has narrowed, volume has declined. Demand appears to have run out of legs. Price has spent 4 days at 87.5/88. If you had taken a long, then the demand line will guide you when to get out. Given the action over the 4 trading days, a short could be considered should the demand line be broken, an entry below the low of the 17th.

 

Aug 19th

80 acts as support again. Price bounces off and if one is not in already, then here is a good as place as any to go long. For those who have taken a short at 86, you treat the 17th as a lower high and let the supply line guide you. Likewise those who are long, draw your demand line from the climax low of the 9th.

 

Aug 28

Supply and demand lines converge to form a hinge.

Aug 29

And its the shorts who get taken out, if they were using the supply line as a guide. Those who had taken the short at 86 may consider 88 as pot'l R and 88+ as their stop loss level.

 

Aug 30 - Sep 1

3 days of failure to close above 88.5. Note the daily price range has narrowed again. We appear to be in a trading range between 80 and 90. A short could be taken here, or below the low of the 1st.

 

Sep 6th

Price bounces off the lows, warning those who are short that previous R might not hold. Demand line in tact.

 

Sep 16th

Demand line in tact but no higher high since Sep 1. Note daily price range has narrowed again. Volume has been steadily rising and the buyers are happy to eat away at supply, until now. Volume has now dropped off considerably. Supply has consumed what there was to offer, we are still below R and demand has dropped off.

Where do we consider weakness to show? Below the low of the 15th / 16th? Or do we wait for the demand line to be broken. Or do we just automatically short R?

 

Sep 22

All of the above options would have paid off, and those long from S at 80 have had their demand line broken. Note that price has now stopped dead at 80. Given this and that price has fallen on strong volume, long buyers should be wary.

 

Sep 23

Volume over the 2 days has risen above the norm and price still fails to close below 80. An automatic long here would need to be considered as buyers have shown increasing interest (high vol) and protected S. As for stop loss, we need to look at the poke below 80 and the action on Aug 9th. So is the long worth the risk?

 

Sep 26

We now have another poke below 80 and we have to consider that support has been extended to 77.5. So a long above the highs of the 23/26 would leave us some distance from S and our natural stop loss level.

 

Sep 30/31

Price now closes below 80 for first time, and again the next day, but price fails to breach the climax low of Aug 9th and volume is not showing any sign of urgency. So a long here would afford a tight stop. We should also note the supply line from 90.

 

 

Oct 4th

If we hadnt taken the long, we have now broken the supply line and have to be prepared to watch price leave without us.

 

Oct 19th

Auto short at 90? Note the daily range hasnt narrowed like previous trips to 90.

 

Oct 20th

More warning to the shorts. Price bounces off lows and a demand line is in place from Oct 3rd. Note the angle of ascent as well, buyers are not hanging around this time. (Contrast the buying waves to 90 with the 2 selling waves to sub 77.5)

 

Oct 24th

Price finally breaks 90, volume is climactic but closes at the high so it should be viewed as strength, given what has happened since Oct 1. For those looking at a long, note that price has reached the top of the supply / demand channel, and we are approaching S now R at 95 from the Jul trading range.

 

Oct 25th

It shouldnt come as a surprise that price bounces off 95 as it looks somewhat overbought.

 

Oct 26th

We get a retrace to 90, those looking for a long could do so with a tight stop.

 

Oct month end

We have a hinge with pricing closing at dead centre. (Low volume and narrow daily range). A pause before an advance, or preparation for a fall?

 

Nov 1st

Shorts look to drive price down and are rejected quickly. Note the demand line is still in tact.

 

Options from here if one is not already in. Buy S at 90 / Sell R at 95 with tight stops. Or look for breakouts of this range. If we are already long, then we have seen no reason to exit.

[pjohnm 10]

  Nikorivera said:

The first development of the week came in yesterday with a technical rally. Let´s see how this develops during the rest of the week.

 

 

No 2 climaxes will look the same, but this certainly contains the conditions I would look for i.e, very high volume and a technical bounce from a low. Also note the close is well above the open. One could use a buy stop above the June 4th close, or wait for a retrace back to the climax low to enter long.

[pjohnm 10]

  Nikorivera said:

The first development of the week came in yesterday with a technical rally. Let´s see how this develops during the rest of the week.

 

 

Also, contrast with the action on May 4th and 7th, an almost identical scenario. But, we didnt get a bounce above the opening on the 7th, so a buy stop above the high that day would never have got triggered. A purchase near the climax low would have been triggered, and eventually have failed. Would the action from the 7th - 11th have prompted you to get out? If not, then at least you had a tight stop.

[DbPhoenix 42]

  pjohnm said:

This is a long one but there is a lot to consider (reading from left to right):

 

I hope you got as much out of this as you appear to have done. This must be a regular part of your trading regimen.

 

Db

[DbPhoenix 42]

Unfortunately, these kinds of discussions (whether or not something is occurring at the moment), when they take place on message boards, are doomed from the start because they depend so much on prompt responses. What one sees in the morning may change dramatically by the afternoon, and if none of it is addressed until that night, or the next day or the day after that, it becomes next to impossible to ignore subsequent events and see whatever phenomenon it was clearly. If what appeared to be a good trade turns out to be a good trade and one took the trade, he can think Boy, am I glad I took that trade. Or, if he didn't, think Boy, I wish I had. If what appeared to be a good trade turns out to be a bad one, one can think Boy, am I glad I didn't take that. In any case, it becomes impossible for one to formulate an assessment of conditions leading up to the event that are not colored by hindsight. Thus the trader is as confused and helpless the next time as he was this time.

 

Whether one took a trade here or not is beside the point. What is far more important is what one looks for, the criteria one applies, when making the decision to take a trade or not. If he doesn't have very clear criteria that tell him what to look for and follows them, then he's just taking his chances and hoping for the best, which is what so many perpetually beginning traders do, year after year after year.

 

For me, high volume in and of itself is not climactic, and whatever rally may ensue is not necessarily technical. This does not mean that there is no trade off whatever reversal -- temporary or otherwise -- may present itself after a highish volume downbar. But that doesn't make it a selling climax. I needn't go into details about selling climaxes and technical rallies (and preliminary support) here because we have W's course available, particularly Section 7, and anyone who cares to do so can "hear" it from W himself.

 

Db

Edited June 7, 2012 by DbPhoenix

[Niko 10]

  DbPhoenix said:

Anyone who enjoys this sort of thing is welcome to try this one (the oil "bottom" reached last August). Looking at it first glance, the entry seems like an "Oh, well, of course, just buy the retest" example, the kind one finds on those expensive DVDs. But if one has acquired the habit of reading charts left to right instead of right to left, the entry is not quite so obvious. In fact, there are at least six places where one might justifiably enter a long trade here, and all of them would fail.

 

Where are the entries?

 

Why would each fail?

 

 

Ok, here goes my analysis, I must recognize that this one was harder than the last one, as prices were very erratic at some points of the period of interest.

 

This kind of work really brings the market to one´s head, and it improves immensely the ability to spot things in real time, of course I am just starting with this, but I already feel the change in my rationale when watching the intraday chart. Thanks DB once again, this is a great thing you are doing here, I have looked everywhere for a forum in which traders (experts and amateurs) could share without being pitched this or that indicator.

 

 

 

 

During July the market was stuck in ta trading range between 93.55 and 100 with a midpoint around 97. By July 22nd the prices rose on decreasing volume up to the resistance area, were the advance was stopped without a significant increase in pressure from the sellers, this denoted weakness on the buyers side. On the 26th the struggle between buyers and sellers intensified, but the sellers did not manage to hold the decline by the close of the market. Sellers came in strong on the 27th dragging the price to the midpoint of the trading range where the decline was momentarily stopped on the 28th before continuing its down movement with increased volume.

 

On august 1st buyers came into the market but where neutralized at the midpoint where strong resistance came in and took prices to the bottom of the trading range. On Aug 2nd came the breakout after which the market went on a freefall on increasing volume until Aug 9th, when the market developed a selling climax after which the market had a normal 50% reversal on decreased volume, signaling weakness on the sellers side. This was confirmed on the 18th when prices fell all day, (nevertheless it should be noted that volume did not increase substantially), on the 19th, an increase in volume came from the buyer´s side signaling buyers coming into the market around 79.

 

Prices rose again on decreasing volume signaling a possible reversal on the 23rd and 24th of august, this reversal in prices did occur, but prices again found support intraday on the 25th on the midpoint of the last rally, this might have served as a warning signal for those who went short on the 24th. The upside gap on the 29th confirmed the doubts about the downtrend, but although the high of the august 17th was broken, the limited advance in prices without significant increase in volume did not show particular strength on the buyers side, that was confirmed with the reversal in prices at the end of September.

 

Buyers came in at 83, just below the midpoint of the last rally and around the trendline formed with the lows of Aug 9th and Aug 19th, after this the market had a rapid advance (measured by the spread of the September 7th), but found resistance just above the last high of September 1st, then prices fell on increased volume, then rose on even more volume, but were not able to rise above resistance on September 13, signaling that that day sellers were not interested in seeing prices go above resistance.

 

The following 3 days prices went into a trading range on decreasing volume, this trading range was broken on the 19th, and that coincided with the breakdown of the trendline.

 

The market then fell on increased volume, and found support around the lows of Aug 19th, then came a rally on decreasing volume to the midpoint of the last trading range. After this the market fell on increasing volume, until reaching the low of august 9th where it found support. Prices retraced on increasing volume for 2 days before buyers lost their impulse and up-volume faded on October 10th just around the midpoint of the Aug-Sep trading range. Up to this day, it was not clear if buyers or sellers were in control, looking back all the way to July it seems like by Oct 13th we were on a potential point of continuation of the downtrend. This was proved wrong on the following days when the market went up on low volume until it reached resistance at the high of September. By Oct 20th prices retraced to the midpoint of the Aug-Sep trading range, where they found support on increased volume and started their ascend on increasing interest from the buyers who were able to break above Sep resistance and keep prices going up until they reached the lower end of the July trading range, there prices created a new trading range between the two congestion zones of July and Aug-Sep.

 

At the end of the chart, prices had found support at 90 (the top of the Aug-Sep trading range), but did not show any clear signal of a possible breakout direction.

 

As for points of entry for long trades, I really could not find as many as DB identified, but these are the ones I would have taken, I am only describing entry levels, without defining stops or take profits:

 

1. Stop entry after the Selling climax of Aug 9th , this trade had limited potential (and finally failed), as it could possibly stop its advance at the midpoint of the last rally, as it did. Decreasing volume meant that there were not new buyers coming in on the way to the midpoint.

 

2. Stop entry on the high of Sep 1st (That would have been executed in Sep 7th). Due to the risk involved in buying the high, the reasons I find to take this trade are mainly because of the spread in prices on the 7th and the increase in volume.

 

3. Stop entry at the high of Sep 26th, after the test of Aug 9th low. Decreasing volume on the entry day was a warning sign. This trade failed miserably as prices bounced back down on the midpoint of the last trading range.

 

4. Stop entry at the high Oct 4th after the re-test of Aug 9th low. Increasing volume on the entry day served as confirmation.

 

5. Stop entry at the high of Oct 20th , after the market found support on the midpoint of the Aug-Sep trading range.

Edited June 7, 2012 by DbPhoenix
Formatting

[tupapa 10]

  Nikorivera said:

Db, but how do you tell the difference between a pause and a technical rally, I have understood a technical rally as the rebound after a climax, does that mean that Friday action cannot be classified as a climax?

 

Hello Niko, I was reading Neills Tape Reading & Market Tactics, Chapter V Turning Points on Heavy Volume and thought this could answer your question;

 

The man who covers his short position is in greater hurry than the long buyer. The short seller will rush to cover if he believes that the rally will endure some time. If you are contemplating a purchase, you are interested in both these opinion..... if the rally is due mainly to short-covering it is likely to be brief, and may be followed by further declines.

 

How can you tell which it is? Watch the volume and, in this situation, the rapidity of price changes. ...

 

Let us assume that you sensed the turn at the bottom and purchased two or three stocks. Your interest now would be to decide whether to hold for a sizable advance, or throw out your stocks if you misjudged the turn in trend. Your problem then resolves itself into determining wether good buying comes into the market along with short covering. You notice large blocks of stock taken at steadily rising prices. At intervals, the market becomes quieter, with less volume and fewer transactions....

 

...What would you do if you were still short? Or what would be your inclination if you were considering purchases?

 

If you were short, I believe that the fact that prices did not sag, that the market was firm, would make you think yourself: "Here, I had better buy in my stocks while I still have profits".. Likewise, if you wanted to purchase.. you might hesitate somewhat longer; but at the first signs of higher prices you would be likely to jump in with your orders.

 

In this imaginary market, let us assume that we have witnessed a swift rally which lasted for two hours. The dullness which followed, with prices only a dollar or two under their "highs", has lasted another two hours or so. Opinions are evenly divided (SPRINGBOARD ?). Soon you notice a transaction much larger than normal, change hands at the same price as that of the previous sale. Your mind becomes alert at once; you have been watching for this signal...

 

Your attention now is riveted upon the tape in order to see at once wether these large transactions following the dullness are going to confirm your expectations that the advance will be resumed. Before long you will know definitely.

 

I am aware that this has little to do with the nature of support and resistance, moderators might want to move it to a more relevant thread.

Edited June 7, 2012 by DbPhoenix
Link added

[DbPhoenix 42]

  tupapa said:

I am aware that this has little to do with the nature of support and resistance, moderators might want to move it to a more relevant thread.

 

Actually, this has quite a lot to do with support and resistance. In fact, it provides very nearly the basis of support and resistance.

 

One of the defining characeristics of a selling climax is panic. One of the defining characteristics of a technical rally (as opposed to a "quality" rally or seecondary reaction) is short-covering. A downmove may be ending, but the ending and turn need not be drenched with drama, i.e., "climactic". And these turns, or reversals, are just as tradeable as a selling climax. In fact, they are often easier since the see-sawing is not so extreme. One may therefore be better off looking for exhaustion on the part of sellers and renewed interest/strength on the part of buyers rather than be tangled in buzzwords and catchphrases.

 

As with the importance of price action itself and not how one chooses to display it, the important consideration here is the behavior of traders and not how one chooses to describe it. If someone is resorting to jargon rather than plain speaking, one should make sure that the terms are defined. Otherwise, the fog descends once again and the trader finds himself feeling his way through the muck, as usual.

 

Db