Hi Beany, thanks for your reply. I'll put up an answer tonight or over the weekend, just incase anyone else wants to have a go.....
Hi hazza,
Supply itself is selling - either long positions already held, or new short positions being opened.
Testing for Supply, is the deliberate taking of price lower for a (brief) period, to challenge any sellers present - in essence it is the testing of the market to see if there is any ongoing selling pressure in the marketplace.
As a general rule, price will usually take the path of least resistance, so if the selling pressure above is stronger than the demand below, price will fall. (and the opposite is also true) So when professionals are in the market, and price is in an uptrend, or is ready to breakout of a trading range, they will regularly want to take price down when the opportunity arises, to 'test for supply', which is just a challenge to any sellers to come out of the woodwork.
The 'challenge' part is that sellers would generally want to sell at the best price possible, so if price begins falling, they may miss out on getting the best price. So they are artificially encouraged to come out and sell, so as not to have to take an even lower price for their positions.
Usually a test is a fairly gentle, shallow fall, although sometimes it can be a more widespread violent and fast ramming down of the price, which then becomes a shakeout - remember a shakeout is just nasty sort of violent test, usually with a wider spread than the generic test bar.
(also another use for a violent test, or shakeout, can be used to catch stops. This is generally done for either of two potential reasons 1- to gain more stock in a tight market, and 2- to remove future potential sellers as price is marked up at some later date)
Successful Testing is when there is an upbar in response to the testing for supply. So if price immediately moves higher then the test is seen as successful.
And if there is a downbar in response, the test is considered as a 'failed test' (although an exception is for a secondary test, particularly is the volume is lower on the second test).
Finally, a failed test can be seen as a further sign of weakness in itself, especially if seen after a potentially serious selling event, or in a downtrend.
Hope all that helps, I will have to do some sort of detailed article on testing at some time, as there are about nine different types of tests in all, and they are an important part of VSA/Wyckoff analysis (sadly, I have been a bit short of time lately)
cheers
Expand
