The so-called Support and Resistance and their relationship to Supply and Demand as seen inTrends
Why “so-called Support and Resistance”? In Volume Spread Analysis Trend lines only represent resistance: either resistance to supply, or resistance to demand. Remember: Markets move off of the imbalance of supply and demand. An imbalance with greater supply and the market has to fall; an imbalance with greater demand and the market has to rise.
Therefore: an imbalance of Supply is a Down-Trend where the trend is running under the Supply-Line Resistance. The market is being Marked Down as Smart Money Accumulates (buys) more and more of the market’s supply at lower and lower prices.
The opposite is true of the UP-Trending market: the trend is running over Demand-Line Resistance as the market is being Marked UP. SM is Distributing (selling) to the market’s Demand-Line Resistance at higher and higher prices.
Trends and Time
Moving on with studying the market background through VSA comes Trading Ranges, Trend Zones andTrend Clusters. These have the added value of providing a time value for measuring market moves. By taking a look at the background of the market and how it functions within trends it is possible to foresee future areas of supply and demand resistance.
Measuring Trends: there are three methods of measuring trends: Trend lines, which measure the angle, there are two types of trend lines: the normal use and the reverse use. Thrusts are used to measure each drive up & drive down. The third measurement is the Half-Way Point which is an indication of comparative strength and weakness of the correction. Wyckoff found this very important and it shows up in other methods such as fibs, ABC patterns, etc. It is usually a point at which SM takes a break to reassess the situation.
Half-Way Points are used as a measurement of relative strength on a rally or reaction. Unlike other methods which add additional measures (Pivot Points, Fibs, etc.), the half-way point does have a much better reliability. As an example: if a stock moves from $50 to $56 the distance of six points and then reacts, the half-way point would be half of that six points or at $53. Reverse the process for calculating the half-way point on a rally following a decline. Example, if a stock moves down from $30 to $21 a distance of nine points. The half-way-point would be at half of that distance and is $4 ½ points added to $21 gives a half-way-point of $25 ½. Do not expect to go to the exact half-way point. The move must only come within the vicinity of an area of supply and demand resistance.
Trend Range and Zones
This is like Bolinger Bands or Stochastics on steroids. The bottom trend line is the support line and the top line as the supply line. In the bottom Trend Zone SM finds strength developing as Resistance to Supplyand the opposite for the upper zone – weakness developing as Resistance to Demand.
In the chart below it can be seen how Tom Williams (TW) divides a Trend Range into upper quarter and lower quarter – the battleground. It is in these resistance Zones where potential breakouts or reversals are most likely to occur.
While the market moves towards a trend line it is in the Path of Least Resistance. When it penetrates a Zone special conditions come into play. If the market is heading up within the Trend Range it will requireEffort to push through as will be seen in higher volume: it will take professional activity, money and effort to change this trend or no effort to reverse. The exact opposite works for invasion into the lower Trend Zone. If their is to be a breakout it can often come as a Gap.
Effort versus Result
A wide spread upbar on an increase in volume, punching up and through a trend line, while the next day/bar is level or even higher. You are now expecting higher prices. On any low volume down day/bar will confirm this view. DownBars on low volume, especially on narrow spreads shows that there is little selling pressure on the market, confirming that the market is a strong one. However, if the following bars are seen to be up on low volume, narrow spreads, even closing in the middle or low then the market is a weak one. There is no effort to go up. [TW]
TW’s Trend Clusters are the creation of an automatic trend line system for the VSA5 computer program he developed (later to become TradeGuider), that automatically draws trend clusters on his charts. Technically, these are not trendlines but what is commonly referred to as Support and Resistance lines showing where price reacted in the past either by consolidating for a period or bouncing.
I don’t have the platform so the usual s/r lines will have to do. But, TW’s approach to Trend Clusters can still, IMO, power up these areas. As he puts it:
“As you will see, professional traders want to test or to cross resistance with the least effort to them. To cross resistance will cost the marketmaker money which they would like to avoid. Note how the highs and lows may be testing the resistance, but the closing price tends to avoid the clusters.
To penetrate old resistance there might be a sudden wide spread down on high volume, punching through, or a gap down [this is like jumping the hedge]. You may see a drift sideways, then amble through the zone, or a snap move down through a gap. Why this should happen is always open to discussion. The professionals in the markets are aware of resistance levels, not through some complex theoretical analysis, but because they have the orders on their books and they can see both sides of the market as the orders from around the world arrive. They will also see when it becomes difficult to attract business at certain prices [no demand]. What we can be sure of is that resistance to price movement is a reality whether upwards or downwards.”
The Beginning of a Down Trend
Markets do not like very high volume on up bars because something big is happening. Either you have seen a Buying Climax which will mark the end of a rising market. Or professional money is prepared to buy stock from old locked in traders from the last previous high. This is not charity work by the money men but absorption because they are still bullish and are anticipating even higher prices.
The Beginning of an UpTrend
To create a major up trend you need to see the extremes of this process at work. This is known as a Selling Climax and will mark the low point of the trend. The Selling Climax phenomenon occurs when there has been a major transfer of stock from weak holders, that is -traders, who have been locked-in at higher prices suffering the fear and pressure of losses which cannot be tolerated any longer, decide to sell.