The main types of signs of market strength
- Testing is one of the best signs of strength. The price quickly goes down during the day (or another time frame), but the price then recovers, closing at the maximum, and all this is accompanied by a low volume.
- Any pullback to the previous high volume area, now with a low volume, is also a signal of strength (the offer has disappeared in both cases).
- Stopping volume is another good sign of strength. This is the result of a huge number of buy orders that are sufficient to stop the downward movement, and manifest themselves as a high volume on the down-bottom, with the closing usually at the maximum.
- A shake also usually stops the downward movement. Here, the price with a gap goes down and falls sharply after the bearish movement that has already taken place. If the market opens the next day with a tap up, you have all the components of a shake-up, a good sign of strength.
In general, distribution signals do not appear in a strong market, i.e. there are no frequent up-trusts, there is no very high volume on up-days without subsequent progress. And there will be no rounding of the market in the form of a mushroom cap. In addition, there will be no up bars with a narrow spread on a high volume. All or some of these signs will always appear on the distribution area, which will indicate a weak market.
We need to look at the big picture, not just one day. For example, a low volume test is a very strong buy signal if the sales culmination was behind, or the market is already in an uptrend. Exactly the same test does not mean much if the distribution or other signs of weakness are behind. If in these conditions we see a test, and the market does not respond, or the price rises slightly at a low volume after the test, this gives us a good opportunity to open a short position, since we now see a signal of lack of demand in a weak market, which means that the market may fall even more:
The main signs of weakness:
- The culmination of purchases.
- Day (or bar) lack of demand.
- A narrow spread on the up-bottom (bar), updating the maximum, at a very high volume.
- High volume on the up-day (bar), with the market falling the next day (bar) or no rise.
Professionals are well aware of any market weakness. If we see an upward movement after weakness signals, and the volume is low, it is a lack of demand after signs of weakness. In this situation, we have a good opportunity to open a short position.
In liquid markets, weakness often manifests itself in the form of a very high volume on the up-day (or bar), and at this volume the index or stock stops moving up, moves sideways or even falls. The high volume must have shown the transfer of shares from strong holders to potentially weak holders, otherwise the index or the stock would not have stopped the rise.
What else could a high volume show? It could also be an absorbing volume. It represents professional purchases or takeover offers (sales) from traders who have long been locked in unprofitable positions and from old trading channels on the left.
Here it is necessary to carefully consider the up-trust, an important sign of weakness, especially during the distribution phase or after the appearance of other signs of weakness. This sign of weakness is marked by a wide upward spread during the up-day (bar), but with a subsequent fall and closing at a minimum, on a high volume. This activity usually indicates a weak market. If a high volume indicated purchases, then, of course, the closing price would be at the maximum, and not at the minimum.
Closing at a low indicates that the high volume contained more sales than purchases. This is a common sign of weakness before moving down. There is an additional benefit in catching the stops of short traders, as well as encouraging other traders to open long positions.
There is often another type of up-trust that occurs after a significant decline in a stock or index. The movement is the same, but this time the volume is low. These are traps set by layout makers to catch the stops of short traders. On the up-trust that appears, the short trader closes his position and can even buy. People waiting for breakouts up will buy on the up-trust - they will all be caught through this profitable manipulation. Traders outside the market can also buy, fearing to miss the movement.