What’s the Right Trade?
What’s the Right Trade? is a new offering at TradingPsychologyEdge.com. We take a close look at a chart in the video below and ask you, “What’s the right trade?” Is it to go long, to sell short, or stand aside? Check out the video below and give your opinion about what you see and what to do in this trading situation in the comments section below. I’ll give you my take on the market and why from a Wyckoff perspective in a few days.
Be sure to let us know if you like this feature. If you do, we’ll keep doing it!
This is a spring In uptrend. But the volume is pretty high (Wyckoff Spring #2) so I would would Wait for low volume test before entering on long side.
I was going to say long on a move above the current bar. Looks like Siks has an educated answer. I think there might be an alternative entry, that is to wait for price to move up and then take the second entry long.
Walt,
It’s always best to make your own decisions in trading :). Whether they turn out to be right or wrong isn’t really the issue. It’s always how you get to your decision. Trading is a tough business because outcomes are unknown and uncertain and the information is always never fully available. Therefore, it becomes critically important to have a sound decision-making process. Working to make your decision-making process clear and as complete as possible is one of the best things a trader can do, though few traders ever really think about this.
Siks,
Can’t argue with that!
Hi,
I, should wait for further development before taking any trade. following are the reasons:
1) up trend channel from the bottom around 92 is broken down decisively by second last bar, which is a very weak bar as its spread is wide and close is near the low on very high volume.
3) in this up trend channel price was not reaching the over bought line, indicating subtle weakness.
2) there was a significant supply on the top, which initially looked like a pushed up through the supply but next bar by closed near the low washing out all the gains of previous bar.
4) last bar seems like a test bar but volume is very high. which may push the price little bit up and price may get resisted at the support line of a up trend channel. That may be a good place to look for short with weakness in the background. look for no demand or an up trust bar on secondary reaction.
5) price has also broken the last higher low 101.
Regards,
Nitin
Very thorough, Nitin. Nothing to add here.
Great idea!
In my opinion, in a short term, market should move a little higher (clustering of closes and high volume bars) but on the other hand we have the biggest decline shown on the chart and the broken trend line…. I would wait and see if we have good follow through to the up side and wait for the test. If the demend dries up, I would look for short opportunity.
Hi Pawel,
Glad you like this. You are making some good observations here. We might be seeing a clustering, though I usually like to see more than two closes. I do agree with you: the last two closes at the same level suggest an attempt to rally tomorrow.
The main thing to note is the background, every previous break above the most recent high we have held gains pretty well. In the most recent attempt to rally above the high we see a change in character of the trend, the downward stride has increased which is a subtle sign of weakness couple with the bottom of the trend channel being violated.
I notice that there has been other down bars with high volume which have been negated by buying because the next bar has been up (16th bar from right), this suggests that the most recent down bar we are seeing is not abnormal high volume. The recent big volume down bar is also driving to support, which came on the 8th bar from right. We know there was buying on this bar because of the close was in the middle (8th Bar).
Even though there are subtle signs of weakness we don’t see ant climatic action of any kind on the buying side to make me feel a change in trend is in order, also as we drive hard to support on the 8th bar from right with high volume the next bat with higher volume dips below support and buyers step in aggressively as per the firm close.
I would therefore view this swift down move as a shake out and wouldn’t hesitate to buy on the most recent bar.
Regards
p.s. Feel that this is a really useful tool to further development so Dr Dayton please keep this type of exercise going.
Thanks
Tyrone
Tyrone,
Glad you are finding this useful. We are starting to get good responses, so we will likely keep this going. You are right about there being no climactic action thus far. We don’t really see a buying climax here, though we don’t always get one at the end of a trend.
Wait for the market to declare the next move.. There are different outcomes here. Without confirmation of your own analysis any trade is blind |(IMHO). There may be a retest of the high in which there could well be a stacked imbalance acting as resistance. The upward trend may not yet be over. If you want to be right you dont always have to be the first in.
Peter,
Good idea about waiting. Traders often are too impatient and jump in and out at every twist and turn. It took me a while to develop patience. I think it is an important mental skill to develop.
Jumping in and out at every turn is gambling not trading.
That it is, Peter. It’s also impulsivity. If a trader has this bad habit, I always ask them what it is that is causing them to be so impulsive. After some careful consideration, they discover that their mind is telling them stories of what the market is about to do, how they will profit from that, and how they need to jump in and not miss out. Our minds tell us all kinds of stories like that, causing us to act as if we are gamblers, not traders. It’s why I wrote Trade Mindfully. It is a critical trading skill to recognize that your mind is always telling you stories, these stories aren’t always true, you certainly don’t have to believe them, and you can be a much better trader by sticking to your trading process even when your mind is telling you something different.
To me this looks like a potential distribution pattern. Evidence:
1. Low volume during beginning of consolidation followed by upthrust on high volume which fails on next bar is characteristic of an UTAD (Upthrust after Distribution)
2. Subsequent reaction travels rapidly on higher volume through trading range looks like a major sign of weakness.
3. Rally on final bar closes off the highs on high volume, could well be a rally to the ice.
I would be looking to go short on a down bar that takes out the low of the last bar (just above $100) with a stop within the trading range just above the highs of the final bar (just above $102)
Steve
Good thinking, Steve. This wouldn’t met criteria for an UTAD, though. That’s a larger process with more involved SOW.
the trend is uptrend so it will go to up the bigest volume is to reverse the trade
Abdur,
At some point, trends end. Although the market may go up from here, we are always looking for signs that the trend may be ending.
asalam o alikum
i think we have to wait for a test bar which closes in lower 50% of the candle
Safder,
Wa Alaikum Salaam
A test here would indicate that the market will want to rally. Even if it does give a test, is the market still showing strength or is weakness starting to come in?
Hi Gary – a great idea for a feature on the website – and an excellent way to stimulate debate – well done!
The first thing I see is a strong uptrend and a spring on top of previous resistance. This would immediately suggest a long setup. Setting aside my immediate System 1 conclusions however, and engaging a more deliberative analysis I can see a number of significant issues with going long at this point;
1) The trend is quite mature and has rallied a long way and for considerable time without any real pullback. Each pause in the up move has led to a sideways move, so a decent pullback is due. Wyckoff stated that a market has the right to retrace half way back and still maintain its trend which would take it to somewhere around 97 or 98. A more complex ABC type pullback is also overdue.
2) The market traded in a narrow range for 8 or 9 days before gapping higher and breaking to new highs on relatively high volume – which could have been viewed as bullish at the time – but the immediate reversal over the next 2 days suggested otherwise – and instead points to a potential buying climax at or approaching an overbought condition.
3) If the buyers were still in control of the uptrend as it broke to new highs then the retracement should’ve held on top of the resistance of the trading range around 103 and showed a disconfirmation of supply. Instead it showed that supply is present.
4) The heavy volume and firm close on the last day suggests that buyers are overcoming the heavy selling resulting in a market that’s ready to rally again. This may be the case but the problem with this intuitive conclusion here is that the sellers managed to push quite far below the support showing that supply is still present in the market.
5) The last down wave is larger than any previous down waves, creates a LL and contains a down bar with greater EOM down than any previous down bars since the up trend began. This wave represents a potential bearish COB.
Given the combined effect of a mature trend, the push to new highs on heavy volume and immediate reversal, the presence of supply and the potential COB, I would pass on this spring and would instead be concentrating on the nature and character of any rally that occurs to see if it disconfirms the presence of demand and potentially sets up a LH to look for a SHORT with a view to a potential ABC move down to 98 (previous resistance). Just eyeballing it, there would appear to be enough cause around the 103 line for such a down move, should it setup.
So my answer is – stand aside and wait to see if a weak rally sets up a short for a possible move to around 98.00
Once again – a great idea to do this type of exercise and analysis on a regular basis!
All the best,
Brian
Hi Brian,
Glad you like the exercise. We are getting a good response from traders, so will likely continue to do this each week.
Very good analysis. Nice to see you bringing in the mental side of the game with your deliberative mind. Whenever the answer to any trading question comes quickly and easily, it should be a signal to stop, rethink assumptions, and engage in a deeper analysis. Well done.
The 2 bar reversal at the top is a sign of selling as well as a change in character of the rally even though the volume is not especially high. The next down bar is the widest spread of any down bar in the rally on much higher volume. The reversal bar that follows looks like it might be a spring but it’s not a pretty spring on this time frame. Spring or not, with the prior weakness I would suspect the next bar could be a test before a bigger drop. I would wait to see what happens next.
Hi Craig,
Good to see you here! That top reversal is, indeed, a big flag. That should not be happening in a strongly bullish advance. Good observations and smart conclusion.
Ok the 1st bar that draws my attention is the highest volume bar on the chart (lets call it A), supply is coming in the market, if all that volume was buying we would have a wider spread. Effort vs Result.
The following 2 bars after A, were pushed down during the session, under average volume, both of these bars closed firm.
Then we have a wide spread up bar (call it B) on ultralow volume that closes firmly (alarm bells), this bar breaks the resistance from the cluster of closes that bar A is in on low volume, this could mean that supply is non existent and had ease of movement or that sellers have withdrawn, they are tired after capping the market in the cluster of closes, bar A zapped their juice. (looking back in the up move the highest volume bars both showed weakness) The volume is too low, this just shows no demand in my eyes.
Bar after B has 5x volume as B, yet the spread is narrow, it is an up bar, but doesn’t make that much progress to the upside, I think supply is coming back in.
We go sideways bobbing along, volume very low, there is just no demand here.
We then break resistance on very high volume, it gaps up, closes firmly. Ok this could be a legitimate move, I want follow through. However the next bar, is weak, it wipes out the previous bar on relatively low volume, closes weak, near the lows. Now we have a potential upthrust/2 bar reversal (although not the cleanest).
The second to last bar is extremely weak, it wipes out 9 days of closes, has high volume, it continues the downwards move.
Now we have a COB – largest downwave on the chart, we have weakness from the break of the demand line, and SOT as it doesn’t get to test the supply line, upthrust/2 bar reversal, we have also broken the ice and closed under it. All SOW.
The last bar is confusing, it dips under the previous bar then reverses, it closes level.. Buyers were able to penetrate the ice, but sellers came back in and closed it under. It also dips into the high volume area of A, right at the close, this is not coincidence.
One bar doesn’t undo all the SOW seen on this chart. I would personally look to short this market, a low volume retest of the ice, a no supply bar, a break of the low of A. That’s just my humble interpretation, as we all know, anything can happen at anytime 😉
Will
Hi Gary,
I think this will be another of great way of learning Wyckoff and look forward to more- thanks for taking the time to post these exercises.
From the LHS of the chart, supply was overcome by demand where an uptrend began. Mid trend or mid chart, price pushed thru the 91 level with a wide ranging breakout bar with firm close on good volume. However 3 bars later we see the largest volume on the chart with very little result. If this was demand price should have moved higher- so this is a sign supply was now present.
Price then pushed thru the range and past the 102 level on a wide ranging bar, but on very little volume- as if supply stepped aside and price levitated up on very little demand.. The next bar saw a leap in volume, but with little result- supply must have re-entered the market and stepped on demand. The next bar is typical of no demand and is also an inside bar.
Now supply has turned up, it probably won’t go away. Volume dropped right off as price moved within a tight range between 101 and 103.5. The trend is mature and we’ve now moved 10-12 points or over 10%.
On about the second largest volume, price moves out of the range at 103 up to almost 106 and we could almost assume demand had turned up again. But the next bar (3 from RHS) volume drops considerably, price can’t make the prior bar high and closes weak. 2nd bar from the right, again a negative bar closing weak and on strong volume- these two bars wiping out gains made over the last 9-10 bars.
The last bar technically sets up a spring, however, now supply has shown its hand, and because its positioned well into a trend, I’d be very reluctant to be looking for longs. Price may test supply with a small rally, but I expect price to react. The demand line in the trend channel has been weakened, volume has increased at the end of the trend, so I’d be looking for a short set up over the coming days (assuming its a daily chart). Certainly I’d be looking at lower time frames for indication of what price might do around that 102 level and jump in with a short if price tanks.
Dean.
Dean,
Excellent analysis. You’ve come a long way.
Hi. Great exercise.
I will try to keep the things simple.
1) inability of the price to maintain the direction of the demand line (Break of the uptrend line)
2) Shortening of the upthrust
3) the price reversed the advance of the last 9 bars, therefore there is more ease of movement to the downside
4) the price broke the LSL around 102
Therefore I would take a short if the price is unable to make a HH later constitutes a LH and then confirms the LL. (Orange line in the image)
Hi. Great exercise.
I will try to keep the things simple.
1) inability of the price to maintain the direction of the demand line (Break of the uptrend line)
2) Shortening of the upthrust
3) the price reversed the advance of the last 9 bars, therefore there is more ease of movement to the downside
4) the price broke the LSL around 102
Therefore I would take a short if the price is unable to make a HH later constitutes a LH and then confirms the LL. (Orange line in the image)
Simple is always best. Too often, I see traders complicate their analysis. Yours is a nice, straightforward approach. I am not sure I see much SOT up here — maybe a little, but each of the up moves seems relatively strong to this point in the chart. I like it best when things are obvious. That goes well with keeping things simple, I think. Nice work, Jaime, and glad you like the exercise.
I’d be looking for shorts, with a move higher into resistance and structure as the preferred entry giving some tighter risk/stop levels to work with. Alternatively a breakdown below these lows as either the entry, or add-on area if managed to get the pop higher.
Steve,
A short trade might be a good play if a rally were to occur and that rally was weak and either died out putting in a lower high or set up an UpThrust of the most recent highs.
Love the idea Gary, let’s have more please!
My quick answer would be to stand aside.
There are quite a few warning signs that all is not well with the progress of the trend. All has been looking good until:
1. Ultra high volume appears on an up thrust bar, where price has made a new high and closes on its lows at about $100.20. Effort to rise has been hit with lots of selling.
2. The Price rise through the $100 congestion zone to a new high of $102.300 is on the lowest volume up bar to that date. No demand from the smart money for sure.
3. The next bar is up on narrow spread on very high volume closing off the high. The stock has struggled to make much headway on heavy volume. It’s also pressing against the supply line of the trend channel. This smells of selling by the smart money.
4. The majority of the remaining bars in the $102 trading range have weak closes and volume has contracted noticeably. There is a spring type bar in the middle of this trading which in confirmed as the next bar is up but there is no follow through.
5. The bar which breaks out of the $102 trading range is on massive volume. Could this have been a buying climax. Price didn’t reach the overbought line of the trend channel. One would have to expect that there be some testing of this high volume bar. The next bar completes a two bar reversal with the following bar confirming the two bar reversal on increasing very high volume, wiping out all of the progress of the last eleven bars. These two down bars have the largest spreads of any down bars in the rally from $92.00. This appears to be a bearish change in behaviour. Furthermore the support line of the trend channel has been clearly broken. At this stage the only positive is that the resistance /support line at around $101 has held up.
6. On the last bar support has come in. It’s a slight up bar and the volume is massive. There is clearly a lot of supply present but someone has stepped in and supported this stock.
What to look for next
Before considering going long I would have to see testing on low volume of the last bar. I suspect that this stock has entered a phase of distribution and it’s being supported to complete this process. If it make a run at the $105 level on low volume it would be a candidate for a short.
Looking forward to your analysis Gary!
Adrian.
Adrian,
Good analysis. That first high volume bar you note in the 100 area is interesting, isn’t it? Lots of activity there without a strong positive result. It’s the first indication of weakness. But then the market holds nicely on the next two bars, testing for supply and finding little at that level, allowing the market to rise higher. I still am amazed that when you look closely, you really can see all the telltale signs well in advance of the market’s next move.
First, the price is in a uptrend, i mark 2 bottoms and 1 top, and i mark too a trigger number zone, present at the up bar closing at close of the lows. Later, the price breakout the bottom or support of the up trend lines, with a good level of effort present in the volume, and then, we see that last bar with a increase of volume (very high i think) closing at the middle and far of the trigger number, i think the best trade is waiting for a confirmation of this last one bar, and a SOS-pullback with low volume at the resistency line of the trigger number.
Thanks for your comments, Dylan. We will see how this turns out shortly
I’d buy with a stop under 98. Reasons: uptrend, spring of last reaction low before a high and retest of low of vertical demand bar. Also last bar shows principle of effort vs. result.
This comment is not specifically related to the problem but I wanted to make everyone aware that MarketSmith has a trading practice tool I’ve found helpful. It’s called Chart Arcade and it allows bar by bar trading of a randomly selected real daily or weekly bar chart from the past. There are no tools except possibly a 50 and 200 day ma so it forces you to trade on price and volume action alone. As I recall I had to take a free trial of MarketSmith to get what appears to be permanent access to the app. The link to ChartArcade is http://www.chartarcade.com/. Link to MarketSmith is http://www.marketsmith.com.
I’ll check this out. Thanks for bringing this to our attention.
Rama sent his response in an email and asked this it be posted. Here is his excellent analysis — really nice work, Rama.
1) Trend:
— Up trend with a pullback that breaks the demand line of the trend channel
2) Structure:
There are three important structural elements noted in this chart:
i) a compact trend channel with an approximately 45 degree angle of ascent
ii) two well defined horizontal lines of support and resistance (HL1 and HL2).
3) Price Action:
Bar A: After breaking the horizontal line of resistance (HL1) on a high volume, bar A closes strongly near its high. This is bullish price action, a sign of strength.
Bar B, in contrast, attempts to go above the close of bar A, fails, and reverses direction to close at or slightly above the support (HL1) line on approximately a third of the volume of bar A.
Bar C rallies above the close of bar B. But, it fails to hold, reverses and decisively breaks the horizontal line (HL1) of support and the demand line of the trend channel. This bar manages to close off its low but well below the demand line of the trend channel. The spread of this bar widens and volume (activity) increases substantially.
Bar D dips below the horizontal line (HL2) of support, rallies above the close of bar C, and closes near its high. There is significant narrowing of the spread of this bar while its volume once again increases substantially. A strong close above the support (HL2), substantial narrowing of its spread and increase in volume suggest that demand might have overcome the supply at Bar D. As a result, the stock may rally and re-test the under surface of the demand line and, if successful, go on to retest the high of bar A.
Additional point: The down wave from A to D was longer than the preceeding up wave. Even though the down wave was accompanied by an increase in volume, the support (HL2) held. This may be indicative of attempt to go down with little downward progress beyond the support level at HL2 (effort vs result).
4) Trade Setup:
A low risk entry near the close or low of the bar D could be considered with a stop below the low of this bar. The area near the high of the bar A could be considered as a potential exit target.
Hi Dr Gary
Just reading the various analysis and your comments
had me spellbound. Many times, whilst trading, I find myself
second guessing my analysis and left paralyzed.
This exercise has brought a lot of clarity and created
a new sense of confidence.
Thanks so much!
Is there a word beyond Awesome?
Desmond
Hello Dr. Gary, I had to take a screenshot and opened it in Paint to draw some lines and have emailed it to you (WhatsTheRightTrade.png)
1) The bar with the highest volume candle in the image has a small range closing in the lower half. Let’s call this A
2) Three bars later, price break the range with a wide range bar closing near the high but the volume is very low, in fact it is the second lowest volume in the image. Let’s call this B
3) The next candle has good volume but the range is small. Let’s call this C. Price continues higher with small range bars
3) The fourth last candle closes on its high with good volume but is rejected quickly and does not touch the upper channel indicating some weakness (If you draw a channel you will see it), Let’s call this D
4) Price comes back to re-test the same area as B with three large range bars re-tracing the previous week’s price action and also makes a lower low breaking the lower channel indicating weakness
5) The last candle closes on its high with greater volume and also closes higher than the previous one which means bulls have not been exhausted as yet
6) I would like to see an upthrust candle at the high of B or C and short it with a stop loss above D
7) Ideally price should go up to D and then short it for better reward/risk