Strength vs Weakness

In this lesson you will learn how to evaluate the Strength or Weakness in a market. It is not enough for SM to simply place a large order. The timing must be right — perfect. They will first plan and then launch, with military precision, a campaign to get their price. Who do they get their price from? The herd. So this campaign is psychological in nature. Look how Tom Williams politely describes a bull and bear market:

A Bull Market occurs when there has been a substantial transfer of stock from Weak Holders to Strong Holders, generally, at a loss to Weak Holders.

Strong Holders are usually those traders who have not allowed themselves to be caught in a poor trading position. They are happy with their position, they are not shaken out on sudden down moves or sucked into the market at or near the tops. Strong holders

are basically strong because they are trading on the right side of the market. Their capital base is usually large and they can read the market and know how to trade it. Strong holders take losses frequently but the losses are low because they close out any

poor trade fast and take account of these losses along with other trades which are generally much more profitable.

A Bear Market occurs when there has been a substantial transfer of stock from Strong Holders to Weak Holders, generally at a profit to the Strong Holders.

Most traders new to the market very easily become Weak Holders. They cannot really accept losses as most of their capital is rapidly disappearing. They are on a learning curve. Weak holders are those traders that have allowed themselves to be ‘Iocked-in’

as the market moves against them, and are hoping and praying that the market will soon move back to their price level. These traders are liable to be shaken out on any sudden moves on bad news. These traders have created poor trading positions for themselves, and are immediately under pressure if the market turns against them.

According to Williams: There are two main principles at work in the stock market which causes a market to turn. Both these principles will arrive in varying intensities producing larger or smaller moves.

Principle One

The herd will panic after substantial falls and start to sell usually on bad news .

Are the trading syndicates and market makers prepared to absorb the panic selling at these price levels? (must be on a DownBar ). If they are, then this is a strong sign of strength.

Principle Two

The herd will at some time after substantial rises as seen in a bull market become annoyed at missing out on the up-move and will rush in and buy, usually on good news. This includes traders that already have long positions, and want more.

Are the trading syndicates and market makers selling into this buying? (must be a UpBar ) If so, then this is a strong sign of weakness.

For a market to move up you need buying, you need to see an increase in volume, not a decrease, but not excessive volume, where supply may be swamping the demand. If you observe that the volume is low as the market moves up you know this has to be a false picture. This low volume is caused by the professional money refusing to participate in the up move, usually because they know the market is weak.

Now to use this to expand on the lesson about Resistance and Trends :

Sign Of Strength (SoS): is an action which shows that Demand is in control. The SoS should have good Demand on the Up Move, a Wide Sread and Increasing Volume on the Upside. A SoS is usually is preceded by a TR and a stock can continue in a TR until it either has a SoW or a SoS. The SoS shows that Demand is in control: the VSA characteristics are that it has a Widening Spread and an Increase in Volume as evidence of good Demand.

Sign Of Weakness (SoW): is an action which shows that Supply is in control. The reaction will decline with a widening spread, increased price weakness and increased volume as evidence of increased, heavy selling. The SoW is also usually proceeded by a TR.

The Beginning of a Down Trend

Markets do not like very high volume on up bars because something big is happening. Either you have seen a Buying Climax which will mark the end of a rising market. Or professional money is prepared to buy stock from old locked in traders from the previous high. This is not charity work by the money men but absorption because they are still bullish and are anticipating even higher prices. [TW]

End of a Rising Market

An UpDay . on high volume, with a narrow spread, into new high ground.

A Buying Climax in an individual stock is usually easy to recognise. The stock has already been in a bull move, but suddenly the price starts to rocket up. The news is good, in fact very good. The Herd gets excited on all this activity and starts buying.

Finding Strength in a DownTrend

One of the most powerful ways to find indicators of strength is testing for Supply. They do this to see if there is still any supply left. They do this by quickly lowering the price if the price closes near the top and has low volume it indicates that there is no supply. Another big sign of weakness is an Absorption Volume Bar. It indicates that the downtrend will soon stop and either reverse or range.

The Beginning of an UpTrend

The Beginning of an UpTrend starts before the down trend ends . It is the last phase of the down trend the herd has liquidated their long positions and possibly are taking short positions. The major move to change the trend will come when SM unloads most of their holdings.