Last week's article entitled, Motion Into Mass: An Example Trade, generated some good questions that I will address in this piece. Never be afraid to ask questions as they can hold answers that can change the way you think about little things as well as major, life-changing thoughts. The trick is to ask the right questions to the right people; easier said than done sometimes. My answers always stem from the basic laws of supply and demand, motion into mass, or whatever you want to call it. The mathematical equation behind these two concepts is the same and has stood the test of time, so I make sure every action I take in the markets is in line with supply and demand. This line of thinking helped us predict the 2009 stock market low in March in the Extended Learning Track (XLT) program. It also helped us predict the 2010 high this year in my "Lesson from The Pros" article from April 27th, Where is the Stock Market Going, so I will stick with this line of thinking and rules. 


Last Week's S&P Chart

Supply Levels
Lessons From The Pros

Your Questions

Sam,

In your latest article referring to the 15 min. es chart, you mention that in the circled areas at the left of the chart that you did not see too much demand. That puzzles me because, as you mentioned, there was an upward gap as well as a couple of long up-bars. Do they not denote pretty strong demand? I would appreciate it if you could expand on this when you have some time.

Thanks again, JP

Thanks for the email and good question. The big green candles and gap area represent price movement to the upside obviously.
However, it is the area of the origin of a strong move higher that we are interested in most. The reason is that the origin of a strong move up in price is where supply and demand is out-of-balance, meaning more demand than supply. So, why not be interested in the origin of the "gap up" in the chart from the article? A key piece of information when price reaches a supply or demand level is "profit margin." As price reached the origin of that gap up in price, there was supply level after supply level on the way down, meaning no profit margin on the upside. This is a sign that suggests not to be a buyer at the origin of the gap up as price is likely to keep declining.

Sam,

In your article, there is a big red candle at the end of that price drop. I see this happen all the time but I don't understand why that happens at the end of a move. Thanks in advance for your answer.

Beth

Thanks for the email and good question. You will see this happen often. The simple answer is that you are identifying the "bandwagon" on a price chart. The majority of traders and investors aggressively buy after a rally in price and into supply levels. Conversely, they aggressively sell after a decline in price and into demand levels, and the picture on a chart that represents this is always the same - a big red candle AFTER a decline in price. Remember how people are taught to buy and sell in markets? They are told to wait for a strong uptrend before buying, and to wait for a strong downtrend before selling. Obviously, the strategy I am proposing in the articles has us entering the market when the risk is low, well before this group as suggested in the chart.

Sam,

Quick question on last week's article if you have a minute. The supply level you shorted at doesn't look like a strong area based on my understanding because there was not a strong drop from the level to tell you it is a strong level. What am I missing?

Thanks much! Philippe

Thanks for your email and good question. You are correct, ideally, we want to see a very strong move away from the level as that would suggest that supply and demand are out-of-balance, in a big way, at the level. We didn't have that here and in fact, the original move away from that supply area was very weak. Three things to remember about this one: First, the rally that day was huge and more importantly, it was all news driven and this brought price way up on the supply and demand curve. Second, there was plenty of room below, meaning a big profit margin which was one of the main points in last week's article. Third, we had a case of "levels on top of levels" which is a strong "odds enhancer." These three things, but primarily the big profit margin below, in my mind, made up for the fact that you mentioned in your question, the lack of a strong move down in price from the level. Had we also had that, it would have likely been an even better level to short at, but it was fine as is.

One thought to be aware of when it comes to questions I think are important is... when I started my journey in the business of trading, I didn't have anyone to ask questions to when it came to charts. I did, however, know that I needed to buy low and sell high if I was going to make this work. What I needed to know was when and where to buy low and sell high. For this information, I asked many questions and answered them by looking at the chart. The price chart gave me the answers I was looking for. The only reason I got the right answers is because I was asking the right question. For example, if I know I need to buy low, where would that be? That would be at a price level where price turns higher. So, what does that picture look like on a chart? Answer: A demand level. I could go on and on, but the answers to some of the most difficult questions in life are really not that complicated. As humans, we love to do things that will kill your trading account. We like to complicate things and we like to do what other people are doing. Ask the right questions, get the right answers and life is good.