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rlim
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Posts posted by rlim
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I need help clarifying why a "test of supply" is a markdown of prices below the support. I would have imagined it would be a test of supply above the resistance. Below is my understanding of the "test of supply"
What is a "test of supply"?
A "test of supply" is more specifically a test of supply below the support level. It is not intented to tell us about the supply above the current price or at resistance. It also does not indicate if price will move higher, which is why we still watch the next bar after a successfully test of the supply. When we test for supply, we are finding the market's opinion if the underlying has reached a bottom.
How does SM marked down the prices?
SM simply sells a small volume of the underlying at a price below support and the bids. SM would then watch the effort to recover above the support, which is measured by volume.
Reactions to the markdown
A. Price continues to move downward.
"Test of supply" obviously failed and found large supply below the support.
B. Prices recover above the support with low volume.
"Test of supply" is successful. Few owners of the underlying are willing to sell below support, expecting higher prices in the near future. Few shorts want to enter new short positions. Shorts don't see the underlying moving further below support, concluding the reward is not worth the risk. Buyers are snatching up the few shares available below support. Shares are transitioning from weak to stronger hands. Market is indicating, at this point of time, that prices have reached the bottom.
C. Prices recover above the support, but with high volume.
Although price was able to hold above support, "Test of supply" is not considered successful. The markdown has triggered a large amount of selling activity. Many stop losses are triggered. Owners are getting worried and exiting their positions to limit their losses or perseve their capital. More shorts feel confident the underlying will move lower and enter new short positions. The high volume indicates a large supply.
Questions about the "test of supply"
However, why is a high volume test of supply not successful?
Although supply was large, demand overcame supply by closing above the support. So why is the underlying considered not be ready to be marked up?
Checking the smaller timeframe for success?
I am imagining a 5 minute bar, markdown is at beginning of the bar. The bar recovers above support in the 1st minute with low volume. The next 4 minutes, underlying is trading above the support with high volue. At a 5 minute timeframe, the test of supply would be a failure, but the 1 minute time frame would indicate a success. I am guessing the 1 minute timeframe trumps the 5 minute time frame and the "test of supply" successful.
Where did you read about or hear about "test of supply"?
Off-topic Posts
in The Wyckoff Forum
Posted · Edited by DbPhoenix
@Db,
I read a couple of places that referred to springs and shake outs as a test of supply. E.g.,
"A spring is a price move below the support level of a trading range that quickly reverses and moves back into the range." link
A spring is a price move below the support level of a trading range that quickly reverses and moves back into the range
@MightMouse,
I am not sure what you mean by "ex post facto", but a successful spring with low volume would indicate that supply "is or might be" available below support.
The article to which you refer is based not on Wyckoff but on Robert Evans' interpretation of Wyckoff. There are no "springs" nor creeks nor ice. There is no "law of cause and effect" nor is there a "law of effort vs result". This is not to say that the Evans version is not useable. But it isn't Wyckoff. If you want to learn Wyckoff's approach, study Wyckoff's course. You will likely find that doing so at this point will be exceptionally difficult due to your having so much to unlearn.
FWIW, I decided a couple of years ago to stop arguing about this and pursue another path: the SLA. In fact, I posted the following to another site just yesterday:
You are of course welcome to study Wyckoff in the original and ask whatever questions occur to you. But if you choose not to do so, you won't be alone. The SLA is far simpler and far easier to understand.
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