Climactic Action

The Law of Supply and Demand

This law states that when demand is greater than supply, prices will rise, and when supply is greater than demand, prices will fall. Here the analyst studies the relationship between supply vs. demand using price and volume over time.

The price of every equity moves up or down because there is an excess of demand over supply or supply over demand. 2. The Law of Effort vs. Results – divergencies and disharmonies between volume and price often presage a change in the direction of the price trend.

The Law of Effort versus Result

The law of effort vs. result states that the change in price [spread] of a trading vehicle is the result of an effort expressed by the level of volume and that harmony between effort and result promotes further price movement while lack of harmony promotes a change in direction.

The Law of Effort (volume) versus Result (price) in action. This law can be seen as working on one bar.

The Law of Cause and Effect

This law states that in order to have an effect you must first have a cause, and that effect will be in proportion to the cause. This law’s operation can be seen working as the force of accumulation or distribution within a trading range that works itself out in the subsequent move out of that trading range.

The idea is to measure this cause and project the extent of its effect. The excesses that develop in supply and demand are not random but are the result of key events in market action or the result of periods [candles] of preparation. Wyckoff teaches what these developments are and how to judge when they are unfolding in time to take advantage of the excesses in supply or demand that will follow.

This law is seen working over a group of bars.

Trends

A market moves up not necessarily because there is more buying than selling going on, but that there is no substantial bouts of selling [profit taking] to stop the up move. Major buying [demand] has already taken place at a lower price level during the accumulation phase, until substantial selling starts to take place [appears as excessive volume on up bars] the trend of the market will still be up. A bear market takes place not because there is necessarily more selling than buying as the market falls day after day, but because there is insufficient buying [support] from the major players to stop the down move. Selling has already taken place during the distribution phase at a higher price level and until you see buying coming into the market [excessive volume on down bars], the market will remain bearish. There is little or no support in a bear market [buying] so prices fall. Herein lies the reason markets fall much faster than they rise… [TW]

Climax: the peak, the extreme or the end of something and as the point of highest dramatic tension or a major turning point in the action. Some synonyms are: top, pinnacle, height, maximum, consummation, culmination or turn of the tide. What does a climax do? A climax stops a trend either temporarily or permanently depending on the subsequent action. A climax is preceded by some sort of a trend.

Climactic action is hall-marked by wide spreads up on very high volume, but the price does not respond upwards. A good trader will now be looking to short the market or sell calls on any low volume up-move (no demand). [TW]

There are two tactics that are used when a Trend is about to reverse: the Selling Climax and Buying Climax.

An important point here is to know the tactics of Retracements versus Reversals. Retracements have: a lack of volatility; small Spreads; and decreased Volume. Reversals, on the otherhand, have: increased Volatility; large spreads; increasing volume. To see this on a chart simply draw arrows for the stock movement and the volume. In retracements the arrows are in the same direction; in reversals the arrows will be in opposite directions.

The Buying Climax

There are two types of buying climactic action seen in the indices with only one major distinction. After a substantial bull move has already taken place, the market moves even higher on wide spreads up. Good news, excitement, elation abounding. You observe the volume is Ultra-high. This indicates that you may have seen a buying climax. [TW]

If the volume is seen to be exceptionally high, accompanied by narrow spreads into new high ground, you can be assured that this is a ‘buying climax’. It is called a buying climax because to create this phenomenon there has to be a huge demand for buying from the public, fund managers, banks and so on. It is into this buying frenzy, that syndicate traders and market-makers will dump their holdings, to such an extent that higher prices are now impossible. In the last phase of the buying climax, the market will be seen to close in the middle or high of the bar.

Those traders that have been waiting to buy start buying – afraid they will miss out on a bigger move up. Even traders that already have positions, buy more. This gives the SM a chance to unload huge amounts of their holdings in this stock, bought at lower levels, without moving the price down against their own selling. After this Buying Climax they sell the stock short, knowing that there is no support or demand at these high prices. This process guarantees huge profits.

The Buying Climax (BC) is the climax ending an uptrend. The buying gradually builds up & builds up and finally comes in with a rush until it exhausts itself on the BC. The BC has increased volume and a widening spread as it moves up. Following a BC one of two things can occur, either a Automatic Rally (AR) or a lateral move. This in turn is followed by one of two things: either a continuation of the uptrend or aSecondary Test (ST). If the supply is to weak to drive the stock down or demand to strong to allow it to go down instead of having the AR the stock will have the lateral move. Usually however, it will have some form of an AR. That AR may have increased volume, heavy volume or no volume. It may have wide price spread, or relatively narrow price spread.

The Selling Climax

The news will definitely be ‘bad’ This, together with the pain of previous falls will panic the herd into selling. This will give SM the opportunity to place substantial amounts of money into the market at bargain prices. Ultra wide spreads down, with exceptionally high volume, usually closing on or near the highs of the day. If the price action does not close on the highs but on the lows and the next day is up closing on the high, this can be regarded as similar action. Add more bullishness if the news is really bad. [TW]

The classic characteristics of a selling climax:

  • Abnormally large volume
  • Wide spreads
  • An acceleration of the downtrend

In the chart below there is a Test for supply (2nd bar in red box), then only light volume and a Spring Trap. This was the go-ahead for the rally to begin.