Wyckoff Method. Supply and Demand Analysis

It is Part 4 of my Wyckoff Method series. So, now it’s time to have a deeper look into its basis – supply and demand analysis or to be more specified reading volume and price movement. We have already talked about the accumulation and distribution.

All you need is a chart. If you see a price bar with wide spread, closing at its high much above the previous several bars, accompanied by higher-than-average volume, you have a sign of demand. Certainly, the opposite is valid for supply. A high-volume price bar with wide spread, closing at its low well below the lows of prior bars indicates the presence of supply. Understanding supply and demand is very important if you want to add the Wyckoff Method to your technical analysis.

There are obvious insights of the law of Supply and Demand: when demand (buy orders) to buy potatoes exceeds sell orders at any time, the price will advance to a level where demand decreases and/or supply increases to create a new equilibrium. The same works for stocks or any other trading instrument. If supply (sell orders) exceed buy orders (demand) at any time, equilibrium will be restored (temporarily) by a price decline to a level where supply and demand are in balance.

I would like to pay your attention to the third law of the Wyckoff Method (Effort vs Result). When volume (Effort) and price (Result) both increase substantially, they are in harmony, suggesting that Demand will likely continue to propel price higher. But in some cased volume may increase, but the price doesn’t follow it. Such behavior during accumulation suggests the absorption of supply by large interests. In other words, it’s a strong bullish indicator. And the opposite works – if you see the huge volume on a rally and not much price reaction, you can get it as the inability to rally. The main reason for it is a significant supply (yup, from big boys mostly).