1. SECRETS. OF A. STOCK EXCHANGE SPECIALIST. Insights, Wisdom, & Trading Strategies from the Floor. Steven Primo. Secrets of a Stock Exchange Specialist - Kindle edition by Steven Primo. Book is not in standard kindle format - more like fixed page size pdf. But it is not a. Undeclared Secrets That Drive the Stock. Market” .. indications that a pit trader, market-maker, specialist, or a top professional trader would see and recognise.
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Indications that a pit trader, market maker, specialist or atop . Average [DJIA] and the Financial Times Stock Exchange Share Index [FTSE]. In some. Or My Secrets of Day Trading In Stocks. By Richard the traders on the floor of the New York Stock Exchange. secrets and interpret the language of the tape. .. Specialists, and the press of business is such that it cannot devote marked. Secrets of a Stock Exchange Specialist lays out the detailed methods of stock The ebook is not formatted as a true ebook; rather it is a PDF.
Unless you have some idea of the cause and effect in the markets you will undoubtedly and frequently be frustrated in your trading. Why did your favourite technical tool, which worked for months, not work "this time" when it really counted? How come your very accurate and detailed fundamental analysis of the performance of xYZ Industries, failed to predict the big slide in price two days after you bought 2, shares in it?
We have been hearing a lot about 'The Big Bang' theory of the creation of the Universe. The whole concept appears complicated, confusing, even beyond our comprehension, when observed from our tiny speck of dust in an apparently insignificant minor galaxy. Many cosmologists believe that the Universe is probably founded on just a few simple concepts.
Some are actively seeking a Grand Unified Theory that explains the whole of the Universe and everything in it in the most elegant and simplest of terms, at the lowest level.
The stock market also appears confusing and complicated, but it is most definitely based on simple logic. Like any other free market place, prices in the financial markets are controlled by Supply and Demand. This is no great secret, however, Supply and Demand as practised in the stock market has a twist in its tail. To be an effective trader there is a great need to understand how Supply and Demand is handled under different market conditions and how you can take advantage of this knowledge.
This book will help you gain that knowledge. These markets are composed of hundreds or thousands of these instruments, traded daily on a vast scale, and in all but the most thinly traded markets, millions of shares will change hands every day and many thousands of individual deals will be done between downloaders and sellers. All this activity has to be monitored in some way. Some way also has to be found to try and gauge the overall performance of a market.
In some cases the index represents the performance of the entire market, but in most cases the index is made up from the "high rollers" in the market where trading activity is usually greatest. I n the case of the FTSE you are looking at one hundred of the strongest leading companies' shares, weighted by company size, then periodically averaged out to create an Index.
These shares represent an equity holding in the companies concerned and they are worth something in their own right. They therefore have an intrinsic value as part-ownership of a company which is trading. The first secret to learn in trading successfully [as opposed to investing] is to forget about the intrinsic value of a stock, or any other instrument.
What you need to be concerned with is its perceived value, its value to professional traders, not the value it represents as an interest in a company. The intrinsic is only a component of perceived value. This is a contradiction that undoubtedly mystifies the directors of strong companies with a weak stock. It is the perceived value that is reflected in the price in the market not, as you might expect, its intrinsic value. We shall return to this later on stock selection.
Have you ever wondered why the FTSE Index has shown a more or less continuous rise since it was first instigated? There are many contributory factors: inflation, constant expansion of the larger corporations and long term investment by large players; but the most important single cause is the simplest and most often overlooked.
The creators of the Index want their Index to show the strongest possible performance and the greatest growth. To this end, every so often they will weed out the poor performers and replace them with up-and-coming strong performers. The Market Professionals In any business where there is money involved and profits to make, there are professionals. There are professional diamond merchants, professional antique and fine art dealers, professional car dealers and professional coal merchants, among many others.
All these people have one thing in mind, they need to make a profit from a price difference to stay in business. Professional traders are also very active in the stock market and are no less professional than any other profession. This is a very simple pattern and has nothing to do with traditionally known chart formations. The comparative pattern graphically tells us what stocks have been under heavy downloading and are in strong hands as well as the stocks that have been undergoing professional selling and are in weak hands.
It has made few errors, but, by and large, the method has worked wonders for me. Just last week McDonalds Corp, the hamburger people, appeared to be under heavy accumulation in my work despite a sharp market break. My figures said the stock was ready for an upmove. All measures of accumulation were impressively bullish despite the soft market. This stock had been priced for an upmove. As I write this, 7 market days later, MCD is selling at 62, up over 13 points from my downloading indications which came at the range.
My million dollar, two part concept, is based upon the central tenent that stock prices advance if, and only if, there are more downloaders than sellers and decline if and only if there are more sellers than downloaders. Conversely, the only thing that will drive prices down is a preponderance of sellers. At the time, I was trying to figure out what tape reading was all about. I spent just about every market hour watching prices chatter by on the ticker.
I wasn't making much progress and certainly wasn't finding it possible to "read" the tape. This particular board room was frequented by a somewhat daffy old gal who was always going to download or sell stock, but never did. She must have missed the boat by just a day, or a point, on hundreds and hundreds of big winners.
At least that's what she claimed, and I'm inclined to believe her. It was unfortunate. One day, a stock she had been following, widely touted as being a super strong stock, began to fall.
In a matter of minutes it was down three points. By the end of the day it was off five dollars.
The next day gave the lady no relief as the stock continued to fall despite the fact the market was rallying! The pressures of losing were getting to her, and she said out loud, to no one in particular, "Why in the hell is that stock going down? Well, that was just too much for the little lady to take. She scurried back to the fellow, demanding he tell her exactly why the stock had been plummeting.
It was obvious she was upset that the fellow hadn't told her sooner. However, her anger was tempered by the fact that someone finally was going to give her the secret to her stock's activity. The old timer, I'll call him Don, had been a broker for many years. He lived through the crash many brokers didn't , and in the process had acquired a great deal of insight into people and the market.
Of those of us in the board room he was the only one with substantial amounts of money, making him the resident guru. He leaned far, far back in his chair and bellowed out, "Any fool can tell you why your stock has been going down.
Old Don had "taken in" another trader. The gal didn't think it was funny though, and insisted she be told how to know when there are more sellers than downloaders. For that Don had no answer. The episode I've just described was one of the turning points in my career. For years I had tried many, many stock selection and timing systems.
But upon reflection, I saw that none of them attempted to break down and identify the amount of downloading or selling taking place in the market. They were all based on something else. Don had hit the nail on the head! Indeed, stocks move due to an imbalance of downloaders and sellers. All I needed to do was develop a method to measure these components.
I'm not going to bore you with the myriad of techniques I fooled around with before I finally arrived at what I feel are the two best ways of identifying professional accumulation and distribution. My very first studies revealed that there are many types of downloaders and sellers in the marketplace, but that only a few, a group I've labeled "the professionals", were worth following. Usually these monks meditate upon probing, seemingly unanswerable questions.
But imagine giving them the market's most difficult question, "For every downloader there is a seller. Therefore, how can prices change, as downloading and selling is allways equal?
My research eliminated much of this confusion as I soon discovered that the one for one relationship has little bearing on prices. Instead, I learned it is more important to notice at what time and price downloaders are wiling to move into or out of a stock. A specific example may help. Then in the area, additional downloading came into the stock; but this was not professional downloading, it was uninformed downloading.
We knew this because the stock already had doubled in value! Those were the people who took the largest gains — the smartest investors.
The same situation held true on the downside. People downloading the stock in the area were the uninformed, the last to get aboard, if you will. The point I'm trying to get across is that in analyzing the download sell relationship, you must take two things into consideration.
They are: 1. Those investors or traders aggressively accumulating stock on days the market is down are indeed courageous in their views. The normal reaction to a down day is to stop downloading. This is best seen in volume trends. As the market moves lower, daily volume continues to diminish. There's really nothing to it other than an understanding of the preceding paragraph.
You see, to spot professional accumulation, all we need to do is find an example of steady and determined downloading in the face of a weak stock market.
When this happens we have a good idea that professional downloading is taking place. Professional selling will show up when we see consistent and determined selling in the face of a strong market. That is, when the market is surging up, but selling pressures enter a particular stock we can bet that we have a stock undergoing professional, informed selling.
The effect of downloading and selling is easiest to see in the price trends of individual stocks. You will be shown other ways to fine-tune and fully analyze accumulation and distribution, but it's imperative for. Now we can begin to concentrate on identifying accumulation and distribution in terms of patterns with the aid of simple stock charts. As the many followers of my service know, I'm not particularly "big" on chart formations and traditional chart signals.
In fact, it's my opinion for the most part, chartists "know not what they do. We've established that the best way to do this is to find individual stocks whose price action differs from the overall market. In an instant you can analyze virtually any stock by comparing its action to the action of all stocks, as represented by a broad market average! To further simplify this evaluation technique, I've devised what I call the accumulation and distribution patterns.
All you have to do is take note of the market average and the action of any stock to see if the accumulation pattern is present. If so, you have a potential candidate for a download. If the distribution pattern is present, you have a potential short sale.
Bullish divergence can best be seen when a stock fails to be as severely affected by selling pressures as the broad market. Another way of putting this is that a stock exhibits accumulation when it does not match the market's downward moves.
Instead, the stock holds up better than the averages on market down moves and rallies stronger on market rallies. You can see from our example of Telex in the summer of Notice that the Dow Jones Industrial Average repeatedly declined to new lows, stair stepping down and down and down. Chart 4 Chart 5 However TC not only failed to move to progressively lower prices, it actually held above its intermediate term lows while the market fell below its corresponding points.
This is a sign of extremely strong accumulation!
Study it well. In spite of a very weak market, the holders of this stock did not panic. They held onto their stock even though the market was taking a clobbering. Thus, we can assume these people had special knowledge. Severe weakness did not disturb their positions for they knew higher prices were on the way.
Additionally, new downloaders were willing to come in and hold up the existing price structure. In short, while most all other stocks were declining, someone, somewhere, had bullish convictions strong enough to step in and download this stock regardless of overall market conditions. What more could we want? Current holders of the stock simply refused to sell, while flurrys of weakness were quickly met with additional downloading. As they say, the stock was in strong hands. It was under professional accumulation.
Notice again we se the market falling to new lows. But this time, instead of seeing the individual stock price merely hold its own, as with TC, Levitz not only held its own, but kept moving up making higher highs and higher lows on each successive stock market move. Let's analyze the situation once more. While the market was moving to new lows, the Bears could not force the price of Levitz down. That's an important question.
Referring back to what I mentioned earlier, remember that a stock moves up only if there are more downloaders than sellers. What was the situation with Levitz? Were there more downloaders than sellers? Obviously, yes. Were these strong or weak downloaders? Very strong! After all, on just small market rallies, which were actually only reactions in a general downtrend Levitz was able to zoom to new highs. There is no need to keep the charts yourself. There are scads of chart services and I'm listing the ones I like at the end of this chapter.
All you need to do is get a clear sheet of tracing paper and make a tracing of the market average and then overlay this with the stock's price average. You then have an excellent comparative basis with which to begin your analysis. The greater the divergence between the market and your stock, the larger move you should expect the stock to make once it begins. I guess what I'm really saying here is that divergence of a few days will forecast moves of a few days duration. Divergence of a few weeks will forecast moves of a few weeks and divergence of a month or more will forecast extended, long lasting moves.
It is particularly important that you compare your stock with the market at critical junctures. By this, I mean important market reversal points. The fact your stock has held up better since last Thursday is not as significant as the fact the stock has held up and performed much better since the last important top and bottom. What we're looking for here is a stock that has consistently underperformed the market. The most apparent example would be a stock that has failed to rally to a new high while the market has moved to a new rally high.
Chart 6 As you study averages, were was coming in for better signs chart 6, notice that while most all stocks, as represented by the able to appreciate in value, this particular stock was not. Selling at a time of overall market bullishness.
Certainly we could not ask of professional selling or distribution! So, in a classic distribution pattern we will see the market move up to a new rally high, while a stock under professional distribution will fail to make the same new high.
The extent to which it falls below this new high gives us an indication of how agressive the distribution is. The greater the failure, the more hurried the professionals are to get out of the stock. There are other ramifications to this selling pattern. Let's take a look at a few. I'd like to begin by showing you the Spring chart of Atlantic Richfield. We did not have a classic pattern here. The classic pattern will not always be present.
Nonetheless, ample signs of distribution can be discovered. This rally was strong enough to lift the averages, i. What happened here was a far different story. True, the stock rallied along with the market, and as there was no new rally high in the market, we did not have the classic selling pattern. But, notice how feeble the rally was, especially in reference to the previous low point at C Did ARC follow suit?
No, it didn't even come close to getting back to this same price area. It was under professional distribution! Chart 7 A different version of this distribution pattern can be seen in the chart of Natomas, another great trading vehicle. Which displayed the greatest strength? The market. What did that tell us about NOM? Simply that it was under distribution. While the averages rallied, NOM barely held its own, managing only to "rally" in terms of a flat line, while most other stocks were rallying at a much sharper angle.
Obtain a copy of any old Trendline chart book, a few sheets of tracing paper and see for yourself how effective this simple method is in detecting accumulation and distribution You can begin working right now on the first part — stock selection — by scanning all the issues you trade or all the issues in the chart books you have, to pre-screen and select the strong and weak stocks.
Those of you who have your own charts, will be able to quickly ferret out those under accumulation and distribution. This is a real boon There's no need to try to seek out every hot story and tip you hear. Nor need you spend countless hours pondering over financial statements. What's more, if you do hear an interesting story about a stock you can check it out, confirm or invalidate it in just a matter of minutes by checking directly the stock's action in the marketplace, seeing for yourself if it shows the broad, overall signs of accumulation or distribution.
Do the hard facts of professional action justify the story? The answer is there in black and white in the chartbook! The patterns I've just unveiled should be your broad, overall selective method. After scanning many stocks you can narrow your attention to those few showing the most bullish or bearish patterns and then begin to follow ffoese issues closely. Because of this, the method can be of real value at what you feel may be major stock market tops or bottoms. Indeed, one of the best long term selection method is simply this: spot the stocks I that have not fallen to new market lows as the market enters into those hard-hitting selling climaxes that snuff out the life in the Bears and ignite the spark of the next Bull market.
A further refinement of this same technique uses it to compare the various group averages, such as the Chemicals, Mobil Homes, Coppers, etc. Then narrow down your investigative work into those two or three select groups showing the pattern you are looking for.
By doing this you can pre-screen all groups in about 15 minutes, virtually covering all stocks listed on the Exchange. That's faster, and a darn sight cheaper, than any computer system yet designed!
Fortunately, most all weekly chart services include charts of the various groups. In the event you do not want to follow a chart service, the back page of BARRON'S contains 36 groups and gives the weekly closing price, net change, etc. In screening stocks you will find several that fit the overall signs of professional accumulation or distribution. You'll then need to select one or two from this group for your account. This further screening is done by selecting the ones, that show the largest price and time divergences with the market.
Remember, check both price and time divergences. Frequently, I find myself "forcing" a stock to fit the accumulation or distribution pattern. Every time I've done this it has cost me money.
Do not try to read something into your stocks that isn't there. Nor should you leave out or disregard the bearish implications because of a pre-disposed bullish disposition. Trendline Hudson St.
New York, N. I did, and still do, my share of research into new indicators, trading strategies etc. The overwhelming part of my research has produced nothing but failures and false starts. Fortunately, a few gems have percolated through the reams of paper, computer printouts and squiggly charts I've drawn late at night. One such gem is the formula I use to measure the amount of accumulation and distribution taking place in any stock, at any time and any place. Should the stock be up the next day, that volume is added to the new figure of 5, Should the stock run into selling pressures the following day and decline on shares, you would subtract the volume giving you a new figure for the day of 5, 6, — The first bar is down on reduced volume [no serious professional selling] while the second bar is known as a 'test' in a rising market [see definition of a 'test'] Both of these indications are bullish.
Activity in the market, either on a busy day or on a quiet day creates a price spread which is seen on your chart as the high, low, and close. It is a vital part of analysing the market. Couple this spread information with the volume and you will have real insight into the way the market is going. A Simple Example -End of a Rising Market Assume we have already seen substantial rises in the market and the market is now suddenly into new high ground. High volume appears with a narrow spread on an up day.
Why does this give us a sell signal? If the high volume [high activity] had represented mostly downloading surely the spread would have to be wide and up? We know now that the market makers do not want to give you a good deal. downloaders coming into the market need somebody to download from. Professional money will not do this if theyare expecting higher prices, but will if they anticipate lower prices.
However, you will probably never notice this indication when it does happen becauseyou will have been absorbing all the euphoria and good news which always happens ona market top. If you have long position you are far to happy of thinking of selling, youmay even be thinking of downloading more.
Its not easy to think like a professional trader,you have to work at it. End of a rising market [one of several indications]So the essential ingredients to this bearish indication areAn up-day, on high volume, with a narrow spread, into new highground. Each element is essential for an accurate signal. The volume here tells you how much trading is going on and that it is high. The newhigh ground shows that the volume of trading has not been influenced by other traderslocked-into the market [which we will cover in some depth later on].
What we are seeingis the market makers telling us their bearish views of the market by the narrow spreadon high volume on an up-day. How do we know this process is going on? Because you would act in a similar mannerif you were a dealer bidding at a public auction. You can see both sides of the market. You have a good idea what you can resell the item for once you own it and you canalso see the price it is going for as the auction progresses.
The perceived value, at thatmoment in time, of the item being sold is soon realised. If the item is undervalued inyour view, you will soon bid-up the price. If you think the item is of poor value you willnot bid up the price resulting in a narrow spread in your price band, you are bearish ornegative on the item. On the other hand the Auctioneer's main interest is in selling theitems.
Several years ago a good friend of mine asked me to attend a boat auction withhim. He had a small boat he had placed in the boat auction. It is seentime after time and is known as 'No Demand' mark-up. We assume this is done by themarket makers and pit traders. At all times the market makers will have both download and sell orders on their books, but theprinciples of volume and its relationship to the price spread will always be there invarying degrees.
It is the turning points we are looking for, so we are looking for theextremes of volume indication, coupled with the spreads and other logical conditions,which will be pointed out later. What is also very important to remember is that once you see weakness in the marketthis weakness does not just disappear. The market may drift sideways or even startgoing up, but because of the weakness in the background the market is certainly notgoing very far.
If this does happen, an astute trader will look for a no demand or up-thrust trap to short on.
Volume has increasedshowing that professional money is behind the move. Is the move going to last? The next three bars are up, however, it is the down bars that will tell you if the move isgoing to continue up.
At point b we see a down bar, the volume is less than the twoprevious bars and is low volume. This immediately tells us that there is no selling fromprofessional money. If there is no supply then expect higher prices. At point c we have exactly the same massage, The bar is down closing in the middleon reduced volume. Point d The first sign that all is not well.
Volume has increased on this down bar. Supply in the market has increased. As the market moved up to point e note that allthe bars except one is showing weakness.
This is'no demand' No demand is especially noticeable at point e and at point f It is nodemand from professional money that causes a market to rollover on the tops givingthe chart the characteristic mushroom top. Automatic indicators. I Same chart as above but showing.. Indications of either strength or weakness appear as arrows either above the chartpointing down [weakness] or below the chart pointing up [strength]. Signals appearautomatically once the high, low, close and volume has been added.
Each bar is alsocoloured either green or red as an ongoing indication of strength or weakness. Noformulas are used. It is important to understand that the market makers do not control the market. They areresponding to market conditions as they appear, and taking advantage of opportunitiespresented to them. Where there is a window of opportunity provided by marketconditions -panic selling or thin trading -they may see the potential to increase profitsthrough price manipulation, but they can only do so if the market allows them to.
Youmust not therefore come away with the idea that market makers control the markets. Noindividual trader or organisation can control any but the most thinly traded of marketsfor any substantial period of time. For a market to move up you need downloading, you need to see an increase in volume, nota decrease [but not excessive volume, where supply may be swamping the demand] Ifyou observe that the volume is low as the market moves up you know this has to be afalse picture.
This low volume is caused by the professional money refusing toparticipate in the up move, usually because they know the market is weak. Unless they are interested in the move it is certainly not going very far. Theopposite is also true for down moves.
The reason for the non-participation of theprofessional money is that they have seen weakness in the background action. Theyknow the market is weak! During a bear market you will frequently see temporary up moves on low volume. Thereason for the up move is of no concern to us, but we see a market that is bearishgoing up on low volume. This can only happen because the professional money is notinterested in higher prices and is not participating, hence the low volume.
Theprofessionals are bearish and have no intention of downloading into a weak market justbecause it happens to be going up. If this action is seen with a trading range to the left[a top to previous action to the left on the chart at the same level it is a very strongindication of lower prices. Chart six. Dow Jones industrial chart showing the simple logic on how to interpret volume. Anytime frame will show similar principles.
Chart courtesy VSAFiveIn most cases the mark-up at a is quite deliberate and is likely to be on'good news'. The mark-up usually starts off with a wide spread up early in the day.
Theyare trying to put full emphasis on the deception to draw as many downloaders in as possible. This also catches stop loss orders, shaking shorts out of the market. Any downloaders on theup-move can then hopefully be locked-in by sharp down moves later. There is nothingsinister about all this, you would do exactly the same thing given the opportunity. No demand is seen afterprofessionals have seen weakness in the background.
They know something you don't. Point a There is a wide spread up closing on the highs, the news will be good. This isfine until we look at the volume below. It appears to be high. If this is downloading volumewhy should the next bar be down?
There is a possibility here that stock is beingtransferred to potential weak holders. We need confirmation. This very soon arrives,even on the next bar at point b. Here we have an up bar on greatly reduced volume. This is 'no demand'.
Professional traders have started to transfer sock to eager downloaders. We know this because every time there is a up move or up bar professional moneywithdraws from the market. We can see this by looking at the low volume.
No demand is even more marked at point c You now have two confirmations that themarket is weak. At point d here we see two up bars both on high volume.
This is really a repeat ofpoint a Stock is being transferred from professional traders to uninformed traders whoare anticipating even higher prices. These traders are completely unaware of thevolume implications, and are probably downloading on repeated 'good news'Point e Here we have a early morning mark-up to catch a few stops and mislead asmany traders as possible.
Whenever you see the high higher than the previous bar withthe same bar or the following bar closing lower than the bar at point d , this action is asure indication of lower prices. Strong markets never have this type of price pattern. Butwhat really brings it to life is we have frequent low volume up bars in the background. In a weak market you will usually see up moves giving the characteristic lower tops andlower bottoms seen in a bear market.
You can see these weak up moves because theywill inevitably have low volume up bars, usually closing in the middle or lows, and onnarrow spreads.
This characteristic behaviour of a weak market is clearly seen at point f Point g we have two rapid wide spread down bars. This will lock many traders in athigher prices.
Point h again the characteristic action of a weak market. Slightly different becausethey are on narrow spreads as well as low volume. This is a double confirmation ofweakness ahead. An Exception to the Low Volume RuleThey say that it is the exception that proves the rule, and there is an exception to thisone. This is one reason rigid mathematical rules run into trouble. The market isdynamic, showing the action of human traders, but it still shows logic.
Once the logic isrecognised the confusion disappears. If there is a low volume up day on the very first day of any break-out from a genuineaccumulation area, the result is often a rapid one day up move from the accumulationarea on low volume.
This is NOT a sign of weakness. The wide spread up and out on the first day from a genuine accumulation area on lowvolume is caused bya shortage of stock. In accumulating stock, as we saw earlier, thetrading syndicates would have removed most of the supply that is available at those20 price levels.
This low volume up move out of an accumulation area is therefore anindication of strength. The difference is that you will have a downloading phase during theprevious few days or bars, not signs of weakness. Most up moves on low volume are a sign of weakness.
However, try to recognize the reasons. Bullishbars do not look like this. The market falls rapidly on two bars, closing on the lows. Thiswill lock many traders in on the highs. This action looks weak but we need confirmationthat we are in a bear move.
We know this becausethe volume is very low so this cannot be a genuine lasting up move. We can also seethat the low is slightly lower than the last low. The trend is down and it is alwaysinadvisable to trade against the trend of the market. Markets do not like high volume on up bars, especially if the price spread is narrow. Because if the high volume had been downloading volume why is the price spreadnarrow? A narrow price spread shows that the professional traders have transferredstock to potential weak holders supplying their downloading spree throughout the day.
Thisaction caps the top end of the market causing a narrow price range. On the followingtwo bars there is very little price gain. The market had stalled on the professionalselling. Point d Throughout this book you will hear of professional traders going for the stops. Above or below all actively traded stocks or future contracts, there are not hundreds ofstops, but thousands.
To trigger these stops is a profitable manoeuvre. This activityallows professional traders to trade away from the true value of the market at thatmoment to their gain. At point d is a classic example of an up-thrust, and a sign of weakness. Up-thrustcome in all shapes and sizes but the principles are always the same. Up-thrusts appearafter you have seen weakness in the background. The market is weak, professiontraders are expecting lower prices.
Good news or a temporary lull in the market hasallowed market makers to mark up the price into the area where most of the stops havebeen placed. This means that if you have stops in that area you are forced to downloadcontracts away from the true value to cover your perfectly good short position. It is always a good idea to look for confirmation on bars following any indication ofstrength or weakness.
At point e we have an attempt to go up which has failed. Weknow this because the volume is notably low.
This is no demand after a serious sign ofweakness. The chart we have been analysing shows a bearish market, easy to see in hindsight,with lower tops and lower bottoms. This causal observation however is not goodenough for us, because packed within this chart is a huge amount of information tellingus why the market is bearish.
Admittedly easy to identify in hindsight bar by bar. Theimportant point is to keep in mind is that all the indications of weakness must have beenthere in the first place, as the market was unfolding day by day.
You will no doubt havedifficultiesf in analysing a chart as it unfolds bar by bar until you have trained your mindto think like a predator rather than run and act with the Herd. Practically all these upbars on this chart will be accompanied with 'good news' of some sort.
If there is nogood news available the news media will simply make it up to explain away the suddenup move taken place on any particular day. Your subconscious mind will be busyabsorbing this information whether you like it or not and forming an opinion. To theuntrained mind that view will be bullish, therefore you will not have even noticed volumeimplications telling you otherwise.
If all this sounds paranoiac to you perhaps you needconvincing. Try collecting all the 'good' news and 'bad' news articles from yournewspaper, record or take notes on television comments about the market. In three orfour months time go back and see what exactly happen on that news. You might besurprised to find it is quite a good trading system to download on all bad news and to sell onall good news. During a bear market volume is generally lower as prices fall.
There are fewer traders,professional money is not downloading in sufficient amounts to make the volume even average,because they are bearish. A marketmaker or specialist will never fight the market. He will takeadvantage if possible, but will never fight the trend. If he does he will go bankrupt. If any up22 move occurs and he is still bearish, he simply withdraws from the activity. This is the cause oflow volume during the up move [in other words the professional trader is not interested].
You have to ask yourself, why do the members of the self regulated Exchanges aroundthe world like to keep true volume information away from you as far a possible. Because they know how important it is in their trading and analysing a market. The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there appears to be very little informationavailable and very little teaching on this vital part of technical analysis.
To show me achart with prices only and no volume is like asking me to download an automobile with nogasoline tank. Where volume is dealt with in other forms of technical analysis, it is often viewed inisolation, or averaged in some way across an extended time period. There have beensome attempts at utilising volume that, as you will see as you progress, can be quitemisleading. Volume analysis usually attempts to come up with a formula relating the volume to pricemovements.
But I can assure you this approach has its limitations because at times themarket will go up on high volume but can do exactly the same thing on low volume. Then it will suddenly go sideways, or even falloff, on exactly the same volume. Sothere are obviously other factors at work. To understand volume on the day [or bar] it appears, you must observe relativechanges in that volume in relationship to the price spread [price auction].
The close isalso very important. You should also keep in mind that volume changes large enoughfor us to see can only be caused by professional activity. These changes will certainlybe telling you something. Low volume is also very important to us as this show lack ofprofessional activity. Never Believe Everything You Are ToldThere are several popular quotes on the stock market seen in magazines andanleownsgpathpeesrse, linmesa.
You are left with the impression that the market is a very straight forwardaffair, like a genuine open auction at Sotheby's perhaps. But these are in fact verymisleading statements.
But you might bedownloading only a small part of large blocks of sell orders that may have been on the marketmakers' books, sitting there, well before you arrived on the scene.
These sell orders arestock waiting to be distributed at certain price levels and not lower. The market will besupported until these sell orders are exercised, which once sold will weaken the market,or even turn it into a bear market. So at important points in the market the truth may be, that for every share you download theremay be ten thousand shares to sell at or near the current price level, waiting to bedistributed. The market does not work like a balanced weighing scale, where adding alittle to one scale tips the other side up and taking some away lets the other side fall.
Itis not nearly so simple and straight forward. We will return to this point when we look atprofessional distribution techniques.
You frequently hear of large blocks being traded between market makers andprofessionals, by-passing what appears to be the usual routes. These professionals trade to make money and while there may be manyreasons for these transactions, whatever is going on, you can be assured one thing: it isnot designed for your benefit. You should certainly never ignore any abnormal volumein the market. In fact, you should also watch closely for volume surges in other markets related to thatwhich you are trading.