No SupplyOleg Alexandrov
No Supply, in principle, is “a reversed reflection” of the No Demand pattern
Let us check the Wikipedia. The picture below shows a graphical interpretation of the Law of Supply.
This law establishes a direct relation between the price and the volume of supply of a commodity (stock, contract, currency, etc.). The lower the price (P) of a commodity, the smaller the quantity (Q) of the sellers, who would agree to enter a trade, will be.
How does the No Supply look in real life?
This fictional story shows that sometimes trades in the market are executed at prices that differ from a fair equilibrium price. However, while the auntie Aimin story can happen in real life, things are a bit different in the financial market. There is no place for a good nature there and the trades at a lower than a fair equilibrium price are executed mostly due to misapprehension of the traders. Richard D. Wyckoff wrote about it in his method, which became a predecessor of the VSA strategy:
The Wall Street business is financing corporations and trading securities – stock and bonds – which are a result of this financing. Some papers are good and some – not much. Those who produce and sell them to the public, know their value better. The public has a comparatively weak understanding of their real value, except for well-known papers, which existed in the market for a long time.
hus, if, for one reason or another, the exchange price deviates from the real value of a security, this opens a profitable opportunity for entering a relevant position. VSA will help to identify such a case. It is possible to read the No Supply pattern from the chart, when the current price of an instrument goes too low in the undervaluation area, using the Law of Demand and Supply.
Look at a Tom Williams (the VSA founder) chart
Analyze the C bar. This is how Master Tom describes it:
This is a clear test. The price sharply dropped to be closed at the upper quarter and look at the volume – it is low. It is a very positive sign of the fact that the market is about to start the bullish movement. Why? Since the markets move the demand and supply. We saw that the stopping volume entered in Point A and we saw a test in Point B where the volume was, perhaps, just a bit lower. Now we have a very clear test in Point C, where the volume is clearly low. This means that there is no inflow of selling offers in this market. Thus, you should expect higher prices.
Note that Tom uses the “test” term. In order to avoid ambiguity, the “test” term here is short for “supply test”. The test is conducted with the aim to assess the volume of supply in the market. A successful test means the No Supply situation.
The “testing” term, which means “a bounce” from a certain level in the classical technical analysis environment, is different from the “test”, under which Tom Williams usually means the situation of No Supply, Supply Test. The price increase is implied after a successful VSA supply test.
So, in general, the VSA No Supply pattern usually looks like:
- a market effort to go down, …;
- … but the closing takes place in the upper part of the bar;
- the volume is low, which shows absence of interest;
- the next up bar on the growing volume confirms the #NS.
Figuratively speaking the market submerges under the water. As well as a diver needs oxygen, the market needs supply. That is why it is natural that the price increases and the growing volume revives trading, letting in the sellers who are ready to exchange their commodities (cryptocurrency, securities – anything) into money.
EXAMPLES OF NO SUPPLY IN THE MODERN MARKETS
On January 14, 2019, the Savings Bank ordinary stock price formed the day’s low at the level of RUB 194 per share (going down approximately by 1.7% in relation to the closing level of the previous day), but the closing price was RUB 196.80 – closer to the day’s high. The volume was not big – it was smaller than the volume of the previous three days.
A trader who reads a chart using the VSA method can see a bit more if he is equipped with a footprint. He realizes that the testing showed a deficit of supply at the level of the previous strong bar on January 9. Tom Williams would surely have said that this test have provided the professional players with confidence in their intention to move the stock further up. The chart verified the strong mood of the market and the further breakout of the RUB 200 level was not long in coming.
Clusters add transparency into understanding the ongoing processes.
- January 9 – a real power entered the market. Practically all clusters are green. They demonstrate domination of buyers nearly at all levels. The price rapidly grows and breaks the resistance level (marked with a blue line). It is a real demand.
- The No Supply testing. Note the red area on the test low on January 14. It is a splash of sells – most probably, it is an activation of stop losses of the buyers, who were smart enough to go into longs on January 9 but less smart on January 14, when they started to panic and to close manually by stop losses, located in the break-even zone. The market activity shows absence of a real pressure of sells and only a preparation for further breakout of the RUB 200 per share level.
One more example. Let us open something non-standard, for example, a 6-hour ADAUSD chart. It is the cryptocurrency market and data are taken from the Kraken exchange.
- A – the area of active trading. Looking back, we can see that these were panic sells and a major player “built” a long position on the eve of the growth;
- B – a test or No Supply. The price went down to the previous zone of activity (A), but the trading volume was microscopic. It means that the panic was consumed and the market is not interested in trading at those levels and is ready for the growth phase;
- C – a major player confidently consumes ASKs (the green delta) at the breakout of the resistance level, pushing the price to the upper floors.
Any questions about #NS?
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