This week looks at a specific type of Test bar - the Test in a Rising Market
As far as I am aware, Richard Wyckoff did not trade the accumulation or distribution phase of a market.
Instead he almost exclusively traded the mark-up or mark-down phases, as he felt sure that was the phase of the cycle which held the highest probability for success, and therefore carried the lowest risk.
That said, this week we look at a particular type of test, one which I expect Richard Wyckoff would have loved to see when he was trading - the "Test in a Rising Market". We have looked at a generic test and testing generally in the past (test = a narrow spread downbar, closing mid to high, with lower volume). This bar is effectively testing the market for supply (selling), and is challenging any weak holders, or those who may be inclined to sell, to do so (or miss the current price). This is because if there is excessive supply in a market, price will rarely make much sustainable ground higher.
This type of test is possibly the best one to base some rules around when creating a trading plan, as these bars (or their response) offer a nice place for an entry. They work well in all timeframes, and offers a relatively high probability of success.
A Test in a Rising Market retains the form of the generic test, however it is always seen in an uptrending market, and can be used to confirm a trend (the next bar should be up in response to confirm the test as successful). Usually the volume will be lower than the previous upbars, showing that selling pressure is low, and the uptrend is likely to continue. Sometimes volume will not be comfortably low, and a second test may be required. If the second test has a narrower spread, has closed within the range of the prior bar, and volume is lower, price should respond positively to it. If volume was to remain too high, a shakeout, or a period of consolidation (pull back) maybe required to absorb the supply.
A Test in a Rising Market works best and most consistently with strength (serious buying) in the background of the chart. And works worst with weakness (selling) in the background of the chart.
In the chart below, some buying came in at the lows (marked), and this buying was then tested.
Price then broke out and accelerated higher until volume began to become excessive.
Price then came back for a bar to test the market for supply (selling pressure), but volume remained high.
Note - the secondary test had a narrower spread or range, closed within the previous bars range, and volume was much lower.
This is a Test in a Rising Market.
Price then pushed higher in response to the test, confirming it as successful.
Notice how price generally expands in range and volume on the upbars, and contracts in range and volume when the market pulls back. It does this to check for selling pressure, and to reset the volume, on a regular basis as price trends higher.
A chart that acts like this is a good sign of a market receiving strong support, with little serious selling pressure to contend with.
As can be seen though, all good things come to an end.
An obvious supply bar eventually turns up (narrow spread upbar, close off the highs, on high volume, and next bar is down).
You can see that the previous three bars all suggest potential excessive volume (this is a supply event to some degree).
Then after a decent widespread downbar, which wipes out the gains of the last four upbars, and closes level with the last test, price attempts to hold on for a few bars, before price breaks down again, this time even more seriously.
