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Old 02-19-2010, 10:12 AM   #1 (permalink)
StockMarketSynergy
 
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Climactic Action


The business of accumulating a stock is like any other campaign. It requires planning,
good judgement, effort, concentration, trading skill and money to buy stock in very
large amounts without putting the price up against your own buying.
[Tom Williams (TW)]

The terms "bear" and "bull" are thought to derive from the way in which each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down.
[Source: Investopedia]

Nailing market tops and bottoms is impossible, but there are signs that increase the probabilities during relatively shorter timeframes or trends. Add to that the ability to recognize Tests and Traps SM uses to ShakeOut resistance (detailed in later lessons) and the SM Campagn lights up. Notice that single bars are evaluated as clues, multiple bars reveal tactics, but the campaign comes in waves of accumulation and distribution based on the levels of supply and demand. During these waves are the phases of Mark Up or Mark Down which tend to run as Trends.


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 a Secondary 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.


Back to Wyckoff: "Abnormally large and swift volume expansion marks a turning point."





Spot the tests and traps; Buy and Sell Climaxes in these videos:

Sam Seiden webinar on Supply and Demand

From ITU:
Bear Traps
How to Spot Market Tops
Trend Reversals
High Base Breakouts

Some interesting, almost VSA, Candlestick videos:
Candlestick Sentiment
Harami Candle Patterns


Rally: A short term advance in the price of any securities or class of securities. When rallies, or uptrends are stronger than the reactions, Demand is stronger than Supply. You will be able to judge the Supply & Demand on basis of the Price action, Volume and Time. There is a widened spread and an increasing volume on the rallies. On the reaction there will be decreased volume and a comparatively narrow spread compared to the rally, indicating less selling on the reaction then there was buying on the upside. In an up-trend you should not have prolonged price weakness or massive dumping of stocks on the reactions.

Automatic rally (AR): Following the Selling Climax one of two things may happen: an AR or a lateral move. This is then followed again by one or two things either a Secondary Test (ST) of the Selling Climax or a continuation of the down move. To understand this we must go back to what happens on the Selling Climax: The Selling Climax is caused by panicky liquidation, panicky selling. The price is driven down to far and this creates a vacuum and as soon as the down move has been stopped the stock should begin to rally. We call this the AR because it occurs automatically. Generally the AR lasts for only a few days to about a week. The rally may be weak or strong. It may be however, so weak and the supply press on the market so strongly that instead of being able to rally well the price simply moves sideways for a couple of days, or perhaps for as much as a couple of weeks and a lateral move will then continue the downtrend. If there is a simple lateral move the stock is far more likely to continue the downtrend then if there is a good rally.

Reaction: A short term decline in the price of any securities or class of securities. When reactions, or downtrends are stronger than the rallies, Supply is stronger than Demand. You will be able to judge this on the basis of the Price action, the Time and the Volume. Volume should remain good, strong, on the downside, the rallies however should be relatively weak indicating a lack of Demand. There should not be wide spread or increased volume or sustained increased volume and it might take quite a bit of time on the rallies. The main point is that you have a unbalanced condition in the Supply and Demand with Supply good on the downside and a lack of Demand, weak Demand on the rally.

Automatic Reaction: Following the Buying Climax is the Automatic Reaction: As with the Automatic Rally, the time factor here is generally measured in days. The extent of the reaction depends on how completely the demand is exhausted and how extensive the first wave of short selling is. The Automatic Reaction will also be limited by renewed buying buy those who see the reaction as a way of acquiring stock at bargain prices, and by the fact that the reaction does not have any significant preparation in advance to sustain it.

Secondary Test: Immediately follows the Automatic Reaction. There should be less selling than on the Selling Climax. Evidenced by the decreased price weakness, the narrowing of the Spread and especially by the Decreased Volume. At that point the down move has been stopped. The stock may go through redistribution, accumulation, or a trading range in which nothing of importance is going on. There may be repeated secondary tests depending upon the ability of the professionals to absorb the supply and the continued existence of that supply.


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