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Price Volume Analysis Trading with the Essentials

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Old 09-04-2009, 02:11 PM
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According to Wyckoff, at any give point of time a stock can be in any one of the following stages

1. Accumulation

2. Markup

3. Distribution

4. Markdown
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Old 09-04-2009, 02:12 PM
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Let us take them one by one. Let us start from bear market to bull market scenario. That will be much easier to understand.

In a bear market, after a prolonged phase of downtrend, at some point, the sellers will be exhausted. Ultimately, we shall reach a stage where “selling climax” happens. Selling climax is a stage where almost all or atleast majority of the weak holders giveup their holding in despair that there is no end to the bear market. It is at this stage, that the strong holders (i.e. deep pocket individuals, institutions etc., whom Wyckoff refers as Composite Man) gets his stock in bulk and at a throw away price. Selling climax results in wide rage bar which closes on the lows and which has got very huge volume to its credit. Selling climax may happen in one bar or over several bars. Usually everyone will be talking bad news during those days. News will be bad. But it is the composite man who patiently buys stock from these panic stricken sellers aka weak holders. He knows that this is the one period which will allow him to accumulate sufficient quantity of stock without setting up the price against his own accumulation. Another advantage is that when the stock is transferred from weak holder to a strong holder, it eliminates the threat of supply in the near future.
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Old 09-04-2009, 02:13 PM
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It is this buying which prevents further slide in the stock price. Not only it prevents further slide but also stock price rally some times. This rally is called “automatic rally” because this rally takes place without much preparation. When compared to the volume which occurred in selling climax, that volume occurring in automatic rally usually is low. But rally will be sharp and quick. This automatic rally usually scares all those short sellers and forces them to cover their shorts.
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Old 09-04-2009, 02:13 PM
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When this automatic rally ends, another down swing ensues. But you will notice that the volume on this down swing is less than the volume that took place in selling climax. Another point to note is that the down swing that takes place after automatic rally may not contain that many wide range bars that were there in selling climax downswing. What I am trying to point out is that this downswing after automatic rally is usually a gradual down drift on lesser volume.

This down swing once again “tests” the bottom that was formed at selling climax. What is there to test? Test is to see whether there are any more sellers left. What will happen if sellers are still not eliminated in the selling climax. They will sell at a later date which will prevent further advance (upmove) in the stock price. This test is called as “secondary test”.
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Old 09-04-2009, 02:13 PM
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How the volume was on secondary test? Where there many sellers? No? What happened after secondary test? Did the price moveup? If it moved up, where there enthusiastic buyers? How forceful was this buying? How did the price react to this buying pressure? To put it in Wyckoffian terms, how was the “demand”? And what was the “supply”? Please note “buying pressure” is different from “demand” and “selling pressure” is different from “supply”.
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Old 09-04-2009, 02:13 PM
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A trading rage will develop in between the selling climax bottom and automatic reaction high. Stock will jump in between these two boundaries for some time. This period will be extremely boring. Composite Man will be buying at the bottom of this range and selling at the top of this range. On the whole Composite Man will be accumulating further stock in this rage and thus he will be building a “cause”.

The composite man will be removing all supply from weak hands in this trading range. Because, it is this weak hands who will sell at the slightest threat to the subsequent advance in the price and thus hinder further upmovement. To moveup further, composite man will have to purchase from these weak holders at higher levels. This is bad business. That is why, the composite man will be removing the supply during the selling climax and also during the subsequent trading range.
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Old 09-04-2009, 02:14 PM
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How does the composite man will know that there is no supply? Simple. By repeatedly testing the bottom of the selling climax. Depending upon the supply, there will be many tests of the bottom. Composite man will not try to markup the price unless he is absolutely sure that there is no threat of supply. Incase any supply is present, that will comeout when the bottom of the selling climax is tested. Sometimes you may notice a sudden and sharp break of the selling climax bottom. That is what is called as “shakeout” This will shake all weak holders thoroughly and they will sell when the bottom is broken. Voila! Then there is a reversal, which is also equally sharp and in the end, market will be as calm as if nothing has happened. If you look at the chart, you will see one or two candles protruding out of the bottom of the selling climax and then reversing. This is known as “spring” also.
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Old 09-04-2009, 02:14 PM
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I have attached the chart of Hindalco which shows “selling climax”, “automatic reaction”, subsequent trading range (“cause”) and “secondary test”.

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Old 09-04-2009, 02:14 PM
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Sometimes one of these “tests” may fail. What is meant by failure of “test”? That is there will be heavy selling when the bottom is broken, which bring forth further hidden supply and the composite man may find it unprofitable to absorb the supply. What will he do? He will restrain from purchasing further this new supply.

Usually during the trading rage development stage itself, the composite man will be getting clue as to whether the bottom will hold during test or not. If he gets any doubt as to the sustainability of the bottom he will quietly sell his accumulated stock during this trading range. But in some worst cases, he may not be able to dispose off all his accumulation during this trading range. In such cases, the result will be disastrous. There will be selling all around. Remember, composite man does not fight the market.
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Old 09-04-2009, 02:15 PM
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Do you remember that I said there will be a trading range subsequent to selling climax? The top of this trading range can be the high of automatic reaction or sometimes just below the top of automatic reaction high. Anyway, this resistance area is known as “creek”.

Once the composite man is ensured that supply is removed, he will try to move the price above this creek and indeed price will break this resistance and move up. This breaking of resistance is called “jump over the creek”
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