Yesterday, the market rallied well and closed on its highs. Normally, we anticipate that the market will follow through on this bullish behavior and reach for higher prices. Today, it didn’t. Instead, it sold off dramatically. You can see the strong move down on the daily chart posted below.
How does a trader deal with a situation when higher prices are anticipated and, instead, a strong sell off occurs? Let’s take a close look at today’s market and see what can be learned.
ANTICIPATION VS. PREDICTION
First, I always think in terms of anticipation rather than prediction. This is an important distinction. When we predict, we are either right or wrong – a rather hard line is drawn psychologically. Anticipation is softer. We think it likely the market will behave in such a way, but it is only a probability. When we anticipate, we also think about market behavior that would negate what we think likely. Not only is this a useful trading skill, it give us cover pscyhologically. We are never wedded to a marlket bias.
SELLERS TAKE CONTROL OVERNIGHT
Coming into the market just prior to the US open (9:30 AM Eastern Time) it was clear sellers had taken control of the market. The 9,000 Tick Chart shows the overnight data well. I have David Weis’s Wave indicator on this chart. You can clearly see that the wave from yesterday’s 1275 high to the pre-US Open low is the largest down wave on the chart. It wipes out all of yesterday’s buying, falling below yesterday’s low. Further, the volume on this down wave shows heavy supply. Sellers entered in the overnight market and drove it down aggressively. The overnight market is normally relatively quiet; this dramatic move was significant. It told us that all bets were off for higher prices today.
WEIS WAVE GIVES AN EDGE
The market did not fall very far off the US Open. Perhaps traders were lulled into buying, thinking the market was oversold and would rally since it wasn’t going down. But the late morning rally was on weak demand (shown by the Weis Wave) and tested yesterday’s low. Note how nicely the Weis Wave picks up the supply on the downwave after testing yesterday’s 1248.50 low (labeled S) and also the lack of demand on the subsequent rally (D), confirming that the market was about to head lower.
WHEN TO THROW OUT YOUR GAME PLAN
It is important to have a game plan, but we also need to know when that game plan should be discarded. We then use classic Wyckoff analysis to assess supply and demand and identify choice locations to make our trades. Using tools like Daivd Weis’s Wave indicator helps give us a further edge.
WEIS WAVE DETAILS
The Wies Wave indicator is a Wyckoff tool developed for the modern markets. It really does give the trader the edge in reading supply and demand as the market unfolds. David did a two-hour webinar explaining in detail how to use this highly effective tool. You can learn more about it here: Weis Wave Wyckoff Indicator.
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