Selling, selling pressure and potential distribution
I thought an example of a Serious Supply Event and then the subsequent price action, might be interesting to look at.
In this example (below) price accelerates higher, then forms a fairly obvious high after some potentially serious selling pressure comes in (arrowed). Price then breaks down in response to the negative influence the selling has created. Following that price makes a pretty good attempt at consolidating the damage that has been done. Then an upbar with a wide spread appears to breakout above the consolidation on very high volume. However, the next two bars following it are down, and on increasing volume. At this point you should be very wary that the upbar which appeared to be a sign of renewed strength after the period of consolidation, was actually ongoing weakness (as it was actually 'full of supply'), and the negative influence that began with the initial supply event continues.
In this case I generally use the low of the upbar on high volume, as the 'line in the sand', although in this case a trend line drawn would also have been useful, and if this level is clearly broken and closed below, then the consolidation will most likely fail.
.
It is important to identify supply, and in particular Serious Supply Events which may be damaging to price.
I thought I would continue on supply, and how it might look on a chart.
This one below shows the 'classic' or perhaps 'traditional' Serious Supply Event (distribution).
They can come in different shapes and sizes, and are not always so clear as this.
In a nutshell, after a period of rising prices (the markup).
The shareprice is accelerated strongly higher (which in itself creates demand), it often occurs in conjunction with a company announcement. Eventually the demand that has been built, is strongly sold into, it may take a period of time to complete this task, following that short position may then be opened, and eventually price breaks down and begins trending lower.
The breakdown usually occurs because those who were previously defending the stock price, and marking it higher. Have now sold out (and may now be short), and without them defending price any longer, there is not enough demand to hold it up. And at some point, those who bought at the top (during the supply event), will realise they might have been sold a pup, and they start getting out, which just increases the supply coming in even more, and also helps to force price lower.......and the self fulfilling downtrend begins......
