Footnotes:
If prices are dropping on volume that is less than the previous two bars (or candles), especially if spread with the price closing in the middle or high of the bar, this indicates that there is ‘no selling pressure’.
Down-bars: s are narrow, Up-bars: Weakness manifests itself on up-bars, especially when spreads are narrow, with volume less than the previous two bars (or candles). This shows that there is ‘no demand’ from professional traders.

• A Bull Market occurs when there has been a substantial transfer of stock from Weak
Holders to Strong Holders, generally, at a loss to Weak Holders.
• A Bear Market occurs when there has been a substantial transfer of stock from Strong
Holders to Weak Holders, generally at a profit to the Strong Holders.



The following events will always occur when markets move from one major trending state to another:
The Buying Climax
Brief Definition: An imbalance of supply and demand causing a bull market to transform into a bear
market.
Explanation: If the volume is seen to be exceptionally high, accompanied by narrow spreads into new
high ground, you can be assured that this is a ‘buying climax’.
It is called a buying climax because to create this phenomenon there has to be a huge
demand for buying from the public, fund managers, banks and so on. It is into this
buying frenzy, that syndicate traders and market-makers will dump their holdings, to such
an extent that higher prices are now impossible. In the last phase of the buying climax,
the market will be seen to close in the middle or high of the bar.
The Selling Climax
Brief Definition: An imbalance of supply and demand causing a bear market to transform into a bull
market.
Explanation: This is the exact opposite of a buying climax. The volume will be extremely high on
down-moves, accompanied by narrow spreads, with the price entering fresh low ground.
The only difference is that on the lows, just before the market begins to turn, the price
will be seen to close in the middle or low of the bar.
To create this phenomenon requires a huge amount of selling, such as that witnessed
following the tragic events of the terrorist attacks on the World Trade Centre in New
York on September the 11th 2001.
Note that the above principles seem to go against your natural thinking (i.e. market strength actually
appears on down-bars and weakness, in reality, appears on up-bars). Once you have learned to grasp this
concept, you will be on your way to thinking much more like a professional trader.


How to Tell if a Market
is Weak or Strong
Buy and sell orders from traders around the world are generally processed and matched up by marketmakers.
It is their job to create a market. In order to create a market they must have large blocks of stocks
to trade with. If they do not have sufficient quantities on their books to trade at the current price level, they
will have to move quickly to another price level where they do have a holding, or call on other marketmakers
for assistance. All market-makers are in competition with each other for your business, so their
response to your buy or sell order has to be realistic and responsive to market conditions.
If the market has been in a bull-move and you place a buy order into a rising market, you may receive what
appears to be a good price from the floor of the exchange. Why are you receiving a good price? Have
these hard-nosed professionals decided that they like you and have decided to be generous giving away
some of their profits to you? Or have they now decided to start switching positions, taking a bearish or
negative view of the market, because their books have started to show large sell orders to dispose of? Their
perceived value of the market or stock may be lower than yours because they expect prices to fall or at best
go sideways. Such action, repeated many times across the floor, will tend to keep the spread of the day
narrow, by limiting the upper end of the price spread, because they are not only giving you what appears to
be a good price, but also every other buyer.
If, on the other hand, the market-maker has a bullish view, because he does not have large sell orders on his
books, he will mark-up the price on your buy order, giving you what appears to be a poor price. This,
repeated, makes the spread wider as the price is constantly marked up during the day.
So by simple observation of the spread of the bar, we can read the sentiment of the market-makers; the
opinion of those who can see both sides of the market.
Frequently, you will find that there are days where the market gaps up on weakness. This gapping up is far
different from a wide spread up, where the market-makers are marking the prices up against buying. The
gapping up is done rapidly, usually very early in the day's trading, and will certainly have emotional
impact. This price action is usually designed to try to suck you into a potentially weak market and into a
poor trade, catching stop-losses on the short side, and generally panicking traders to do the wrong thing.
You will find that weak gap-ups are always into regions of new highs, when news is good and the bull
market looks as though it will last forever


How to Identify Buying
& Selling
For a market to move up you need buying, which is generally seen on an up-bar (i.e. the present bar closes
higher than the previous bar). The amount of volume attached to the up-bar should be increasing in
volume. However, this increase in volume should not be excessive, as this is indicative of supply in the
background that is swamping the demand.
If you observe that the volume is low as the market moves up, you know this has to be a false picture. This
low volume is caused by the professional money refusing to participate in the up-move, usually because
they know the market is weak. The market may be moving up, but it does not have the participation of the
traders that matter. Unless the ‘smart money’ is interested in the move, it is certainly not going to rise very
far.
During a bear market, you will frequently see temporary up-moves on low volume. The reason for the upmove
is of no concern to us, but we see a market that is bearish going up on low volume. This can only
happen because the professional money is not interested in higher prices and is not participating, hence the
low volume. The professionals are bearish and have no intention of buying into a weak market just because
it happens to be going up. If this action is seen with a trading range to the left, at the same price level, this
becomes a very strong indication of lower prices to follow.
The opposite is also true for down-moves. So, for a legitimate down-move you would need to witness
evidence of selling, which would reveal itself as increased volume on down-bars (i.e. the present bar closes
lower than the previous bar). If you see an increase in volume that is excessive, then you should be wary,
as this may indicate that demand is in the background.
If you begin to notice the volume drying up on down-bars, this is evidence that the amount of selling
pressure is reducing. The market may continue to fall, but be aware that it could quickly turn and rise
momentarily, due to the lack of supply. A decreasing amount of volume on any down-bar indicates that
there is no professional interest to the downside.


Testing Supply
Testing is by far the most important of the low volume buy signals. As we shall refer to the subject many times, in what follows, it will be worthwhile to digress here for a moment and look at the subject in detail.
What is a "test" and why do we place such importance on this action?
A large trader who has been accumulating an individual stock or a section of the market can mark prices down with some confidence, but he cannot mark prices up when others are selling into the same market
without losing money. To attempt to mark prices up into selling is extremely poor business, so poor in fact,
it will lead to bankruptcy if one persists.
The danger to any professional operator who is bullish, is supply coming into his market (selling), because
on any rally, selling on the opposite side of the market will act as resistance to the rally and may even
swamp his buying. Bullish professionals will have to absorb this selling if they want higher prices to be
maintained. If they are forced to absorb selling at higher levels (by more buying), the selling may become
so great that prices are forced down. They will have been forced to buy stock at an unacceptably high level
and will lose money if the market falls.
Rallies in any stock-based indices are usually short-lived after you have seen supply in the background.
The professional trader knows that given enough time (with bad news, persistent down-moves, even time
itself with nothing much happening) the floating supply can be removed from the market, but he has to be
sure the supply has been completely removed before trying to trade up his holding. The best way to find
out is to rapidly mark the prices down. This challenges any bears around to come out into the open and
show their hand. The amount of volume (activity) of trading as the market is marked down will tell the
professional how much selling there is. Low volume, or low trading activity, shows there is little selling on
the mark-down . This will also catch any stops below the market, which is a way of buying at still lower
prices. (This action is sometimes known as a springboard)
High volume, or high activity, shows that there is in fact selling (supply) on the mark-down . This process
is known as testing. You can have successful tests on low volume and other types of tests on high volume,
usually on ‘bad news‘. This not only catches stops, but shakes the market out as well, making the way
easier for higher prices. Testing is a good sign of strength (as long as you have strength in the
background). Usually, a successful test (on low volume) tells you that the market is ready to rise
immediately, whilst a higher volume test usually results in a temporary up-move, and will be subject to a
re-test of the same price area again at a later time. This action sometimes results in a “W” shape. This
pattern is sometimes referred to as a “dead cat bounce” or a “double bottom”. The “W” shape results from
the action of re-testing an area that had too much supply before.


High Volume on Market Tops
Many newspaper journalists and television reporters assume that when the market hits new highs on high volume, that this is buying and a continuation of the up-move (the news is ‘good’ and everybody is
bullish). This is a very dangerous assumption. As we have already touched upon during this text, high volume on its own is not enough. If the market is already in a rally and high volume suddenly appears
during an up-day (or bar) and immediately the market starts to move sideways or even falls next day, then this is a key indicator of a potential end to the rally. If the higher volume shows an increased effort to go
up, we would expect the extra effort to result in higher prices. If it does not, then there must have been something wrong. This principle is known as effort versus results and we will cover this in more detail later.
A high volume up-day into new high ground with the next day level or down is an indication of weakness.
If the high volume had shown professional buying, how can the prices not go on up? This action shows that buying has come into the market, but be warned that the buying has most likely come from potential
weak holders who are being sucked into a rally top! It happens all the time.
Chart 8: A rally fails on very high volume (chart courtesy of TradeGuider)
Footnotes: If there is no professional interest to the upside, the market will fall, or at best, go sideways.


Effort versus Results
Effort to go up is usually seen as a wide spread up-bar, closing on the highs, with increased volume – this is
bullish. The volume should not be excessive, as this will show that there is also supply involved in the move (markets do not like very high volume on up-bars).
Conversely, a wide spread down-bar, closing on the lows, on increased volume is bearish, and represents effort to go down. However, to read these bars on your chart, common sense must also be applied, because
if there has been an effort to move, then there should be a result. The result of effort can be a positive one or a negative one. For example, on Chart 7 (pushing up through supply), we saw an effort to go up and
through resistance to the left. The result of this effort was positive, because the effort to rise was successful
– this demonstrates that professional money is not selling.
If the additional effort implied in the higher volume and wide spreads upwards had not resulted in higher
prices, we can draw only one conclusion: The high volume seen must have contained more selling than
buying. Supply on the opposite side of the market has been swamped by demand from new buyers and
slowed or stopped the move. This has now turned into a sign of weakness. Moreover, this sign of
weakness does not just simply disappear; it will affect the market for some time.
Markets will frequently have to rest and go sideways after any high volume up-days, because the selling
has to disappear before any further up-moves can take place. Remember, selling is resistance to higher
prices! The best way for professional traders to find out if the selling has disappeared is to ‘test’ the market
– that is, to drive the market down during the day (or other timeframe) to flush out any sellers. If the
activity and the volume are low on any drive down in price, the professional traders will immediately know
that the selling has dried-up. This now becomes a very strong buy signal for them.
Frequently, you will see effort with no result. For instance, you may observe a bullish rally in progress
with sudden high volume appearing – news at this time will almost certainly be ‘good’. However, the next
day is down, or has only gone up on a narrow spread, closing in the middle or even the lows. This is an
indication of weakness – the market must be weak because if the high activity (high volume) had been
bullish, why is the market now reluctant to go up? When reading the market, try to see things in context. If
you base your analysis on an effort versus results basis, you will be taking a very sensible and logical
approach that detaches you from outside influences, such as ‘news’ items, which are often unwittingly
inaccurate with regards to the true reasons for a move. Remember, markets move because of the effects of
professional accumulation or distribution. If a market is not supported by professional activity, it will not
go very far. It is true that the news will often act as a catalyst for a move (often short-lived), but always
keep in mind that it is the underlying activity of ‘smart money’ that provides the effort and the result for
any sustained price movement.


The Path of Least
Resistance
The following points represent the path of least resistance:
• If selling has decreased on any down-move, the market will then want to go up (no selling pressure).
• If buying has decreased on any up-move, the market will want to fall (no demand),
Both these points represent the path of least resistance.
• It takes an increase of buying, on up-days (or bars), to force the market up.
• It takes an increase of selling, on down-days (or bars), to force the market down.
• No selling pressure (no supply) indicates that there is not an increase in selling on any down-move.
• No demand (no buying), shows that there is little buying on any up-move.
Bull moves run longer than bear moves because traders like to take profits. This creates a resistance to upmoves.
However, you cannot have a bear market develop from a bull market until the stock bought on the
lows has been sold (distributed). Resistance in a bull move represents selling. The professional does not
like to have to keep buying into resistance, even if he is bullish. He also wants to take the path of least
resistance. To create the path of least resistance he may have to gap-up, shake-out, test, and so on, or he
may do nothing at that moment, allowing the market to just drift.
Bear markets run faster than bull markets because a bear market has no support from the major players.
Most traders do not like losses and refuse to sell, hoping for a recovery. They may not sell until forced out
on the lows. Refusing to sell and accepting small losses, the trader becomes locked-in and then becomes a
weak holder, waiting to be shaken out on the lows.


The Relationship Between the Cash and the Futures Price
Futures will fluctuate above or below the cash price, but the cash price sets the limits of any move in the futures market, because large dealing houses with low dealing costs will have an established arbitrage
channel and their actions will bring the future back in line with the cash. This process keeps the price movements between the cash and futures markets largely similar Sudden movements away from the cash price are usually caused by the activities of the specialists or market-makers. These professionals are trading their own accounts and can see both sides of the market (i.e. the buy and sell orders). If syndicates are in the process of selling or buying large blocks of shares, they know these large transactions will have an immediate effect on the market, so they will also trade the futures and option contracts in order to offset or lower risk. This is why the future often seems to move before the cash.
We shall be returning to this topic in a future publication that will introduce more advanced volume techniques.


Remember, it takes accumulation or distribution on the highs or lows to create an imbalance of supply and demand. Once this process has taken place the move is then weighted to go to the edges of the established
trend channel. At the edges of the trading range, if the trend is holding, there is a vulnerability to a reversal. When in the overbought or oversold areas, the chances of a  reversal increases, but here a strange
phenomenon can occur.
The trend boundary line seems to offer resistance in both directions. Having penetrated the resistance in
one direction and passed through the line, there now seems to be resistance to passing back through the
line, back into the old trading range.
Chart 19: Resistance becomes support (chart courtesy of TradeGuider)
This is explained by the action of the market-makers or specialists. If there has been an increased effort to
go up and through the upper trend line (resistance), these professional traders may have taken a bullish
view (this must have been the case for the price to penetrate the line in the first place). Now, as the price
approaches the line again, this time from the opposite direction, you will still need effort to penetrate the
trend line. If the specialists or market-makers are still bullish, there will be no effort to go back down. The
amount of volume will tell you if the line is now going to hold. As we need effort to penetrate a trend line,
any low volume appearing as the price approaches the line will indicate that it is unlikely to be breached
this time.
The exact opposite will also hold true for the lower trend line.


How to Recognise the Likely Market Top
Assume we have already seen substantial rises in the market and that the prices are now into new high ground (i.e. there is nothing higher on your chart to the left). Then we observe high volume appearing, with a narrow spread, on an up-day – this is a strong sign of weakness.
If the high volume (high activity) had represented mostly buying, surely the spread would have to be wide and up. We now know that the market-makers do not want to give you a good deal. Buyers coming into
the market need somebody to buy from. If market-makers or specialists decide to meet this demand and sell throughout the day to those buyers, this will effectively ‘cap’ the top  end of the market, resulting in a
narrow spread up-bar for the day. Professional money will not do this if higher prices are expected – however, they will if they anticipate lower prices.


Unless you are using the TradeGuider software in your trading, you will probably never notice this
phenomenon, because when it does happen you will have been absorbing all the euphoria and good news,
which always happens on a market top. If you have a long position now, you will be far too happy with
yourself to even consider the thought of selling – you may even be thinking of buying more. It is not easy
to think like a professional trader. You have to work at it.
So, the essential ingredients for this bearish indication are:
• An up-day, on high volume, with a narrow spread, into new high ground. Each element is essential for an accurate signal.
Let us break things down:
1. The volume tells you that there is a lot of trading going on.
2. The narrow spread demonstrates that the prices have been      ‘compressed’, which should be a warning to you, when accompanied     by the high volume.
3. The new high ground shows that the volume of trading has not been influenced by other traders that are locked into the market. What we are seeing is the market-makers telling us their bearish views of
the market by the narrow spread, on high volume, on an up-day. Professional money will be selling to such an extent that higher prices will now be impossible.


How to Recognise the Likely End of a Rally?
What types of supply (selling) indications will stop an up-move?
If you are a bullish trader, there are only five major signs of supply (selling) to worry about. These signs of supply will slow a bullish move, or even stop it – they are:
1. The buying climax.
2. A failed test (a test that is not accompanied by low volume).
3. Narrow spreads accompanied by high volume, on an up-day, into new high ground.
4. The up-thrust.
5. Sudden high volume on an up-day (bar), with the next day (bar) down, on a wide spread, closing below the low of the previous bar.
It is not difficult to spot these signs.

The Buying Climax
The buying climax only comes along on rare occasions. It is hallmarked by a very wide spread up to close well off the highs on ultra-high volume. This is after a substantial bull  market has already taken place. If
you are in new high ground, this is a certain top. A test with low volume indicates higher prices; however, the same test with high volume indicates supply present. The market is  unlikely to go up very far with
supply (selling) in the background. Narrow Spreads & High Volume
This is very simple to see. The public and others have rushed into the market, buying before they miss further price rises. The professional money has taken the opportunity to sell to them. This action will be
reflected on your chart as a narrow spread with high volume on an up-day. If the bar closes on the high, this is an even weaker signal. This type of action is seen after a rally of some sort. Buyers are drawn into
the market, usually on good news, which gives the professionals the opportunity to sell. Remember, you are not trying to beat the market, but join the professional money. You can sell with them, and you certainly should not be buying.


Up-Thrusts
Up-thrusts can be recognised as a wide spread up during the day (or during any timeframe), accompanied by high volume, to then close on the low. Up-thrusts are usually seen after a rise in the market, where the
market has now become overbought and there is weakness in the background. Up-thrusts are frequently seen after a period of selling, just before a down-move. Note the day must close on or very near the lows;
the volume can be either low (no demand) or high (supply overcoming the demand).
Market-makers are quite capable of generating an up-thrust, which is a moneymaking manoeuvre. The dynamics of an up-thrust are interesting and quite brutal – the rapid up-move brings in buyers and catches
stops. The traders who are already selling (shorting) the market, become alarmed and cover their positions.
It is a common strategy to suddenly mark-up prices to catch the unwary. This action is seen after signs of
weakness and frequently indicates the start of a falling market. Once the market is known to have become
weak, market-makers or specialists can mark the prices up quickly, perhaps on good news, to trap you.
The higher price is maintained for as long as possible. The price then falls back, closing on the lows. As
the early price is marked up, premature short traders are liable to panic and cover with buy orders.
However, those traders looking for breakouts will buy, but their stop-loss orders are usually triggered as the
price plummets back down. All those traders who are not in the market may feel they are missing out and
will feel pressured to start buying. This action is also designed to entice large pension funds, fund
managers, banks and so on into the market. You do not have to be a small trader to be forced into a poor
trading position! Overall, these up-thrusts are very profitable for the market-makers or specialists. An upthrust is usually seen after a period of weakness and usually indicates lower prices.
Remember that the market-makers are in the enviable position of being able to see both sides of the market and have a far better view of the real situation than ordinary traders could possibly have. Surely, if the
market-makers were still bullish, they would be gunning for stops below the market rather than above it.


The Selling Climax and
Professional Support
A selling climax is indicated by ultra-wide spreads down, with exceptionally high volume, usually closing on or near the highs of the day. Add more bullishness if the news is bad!
PROFESSIONAL SUPPORT (OR REVERSE UP-THRUST)
This action is very similar to a selling climax but is less intense – the reverse up-thrust can be thought of as
a mini 'Selling Climax’. There will still be a wide spread down-day, often driving down into recent or new
low ground, and then closing at or near the highs, on high volume. Note, this indicator is more reliable
when the day is gapped down and the following day is gapped up – add more bullishness if the news is bad.
Any down-day on low volume (no selling) after this event, especially if it closes on the high of the day, is a
strong indication of market strength.
This professional buying (absorption of the supply) will usually stop the down-move. The more liquid the
market, the more buying will be required to stop the down-move. The four major currencies are good
examples of liquid markets. Here substantial volume is usually required over several days to stop a downmove.
Without accumulation, every rally is doomed to failure. Without distribution, every down-move is also
doomed to failure. Every move is directly linked to the amount of shares that have changed hands, which
creates an imbalance of supply and demand, tipping the move one way or the other.
(Editor’s Note: This next section of the book was written during the early 1990s)
There is a strong body of evidence to show that these processes are at work and nowhere more so than in
the Japanese stock market. We are told constantly that the wealth of the world is moving to the Far East.
The country that immediately comes to mind is Japan. We are also told that the balance of trade is
constantly in Japan's favour. Nevertheless, looking at the Nikkei Index we see that it is constantly making
new lows! How can this be? How can the Index that represents potentially the richest country in the world
be making new lows, while in far weaker economies the stock markets are making new highs?
Well, at least this demonstrates that the economy is not necessarily the powerhouse that moves a nation's
stock market index. Something else must be at work. This is a great mystery to most people, as they will
naturally think that a very strong economy and many successful companies within Japan will automatically
create a strong stock market, not a weak one.
1,700 Japanese companies all held their annual general meetings on the same day by mutual agreement
during 1991 to cut down on the attendance at each meeting! The uninformed public had been blaming
individual companies for the decline in their stock prices and, apparently, Japanese gangsters were
demanding their money back as well. These gangsters are uninformed like the public, as to the real
workings of the stock market. Company directors usually have very little to do with their own stock's
performance. They are experts on running the company, not on their stock's performance, and are
frequently just as surprised as anyone else is by the action of their own stock.


Once a bull move is underway, the trend will not change until the professional money starts major selling
(distribution). You will have reactions, tests, even shake-outs in a bull move, as different groups think
higher prices are possible. However, the major trend will not change until professional money has taken
the opportunity to unload most of their holdings. This will happen on up-days, on very high volume. This
will take time because a strong bull market has 'momentum’. Look for low volume up-moves to confirm
weakness, after you have seen very high volume up-days, with no results.
It is well known amongst stockbrokers that the busiest time for them is after a bull market has been running
upwards for some time. Right at the market tops everyone is very busy, but when the market is in a bear
phase or collapses, business slows considerably. One well-known brokerage house stated in jest, that it
could tell which way the stock market was going on any given day by the number of telephone calls it
received. This may have been said in a light-hearted manner, but there is much truth in it.
This would therefore suggest that uninformed traders are letting their emotions guide them. They appear to
be showing the greatest interest once a bull market is well underway or at market tops when stocks have
become expensive. They then appear to have little or no interest, in a selling climax, when stocks have
become cheap. The professional money on the other hand are busy selling to the now interested public, at
or near the tops, and busy buying from them near, or on the lows, with little competition or interest from
the public at large.
As prices rise in a persistent bull market, as in the case of the Nikkei over several years, a point will be
reached, when owing to crowd psychology, a mass of optimistic buying will take place from all those
traders who are now convinced they had better get into this market before missing out on everything.
So, as a bull market slowly gathers pace and becomes very persistent over a long period of time, a price
will be reached at some time where traders who are not in the market cannot stand the annoyance of
missing out any longer. This rush of buying gives the traders that accumulated stocks at the lower prices,
the opportunity to take profits without putting the price down against themselves. (“Thank you very much
for your co-operation!”)
This stage of a bull market is known as the distribution phase. It may be accompanied by a buying climax
as described above or a slower rounding over of the prices, taking on the characteristic shape of a
mushroom top over a longer period of time. This slower selling has frequent up-thrusts on high volume
and the price will whipsaw up and down as they support the price to create a small up-move to sell on.
Volume on the up-moves can be either high or low:
• High volume shows that selling has swamped any demand and tends to appear at the beginning of any distribution phase.
• Low volume shows that no demand is present, and tends to appear at the end of a distribution phase.
This slow selling is no mystery. A shop trader can go down to his wholesaler and buy large amounts of
supplies for his shop in a relatively short space of time. Having bought this stock, he now has to sell it
(distribute it) at a higher price than he paid for it. He may have to actively promote sales. This takes time
and cannot be done in a single day's trading. If, however, he holds a ‘sale’ and his whole line is cleared out
in one or two days of trading, then you would have seen the equivalent of a buying climax.
Stocks are frequently hyped-up at the tops of markets (to assist distribution). It is not unusual to see
advertisements in newspapers letting you know how good individual companies are. Company reports are
bullish and hyped news starts to appear on television and in the press. Everything always seems to be rosy
at market tops, but rarely on the bottoms. You do not have to be a stock market trader to fall for this:
Banks certainly have. During the boom days of the eighties, banks lent vast sums of money to third world
countries; some of these countries cannot possibly repay their loans. Many banks were sucked into the
highs of the lending market because they were fearful of missing out. All the other banks were doing it, so
why should they be the only ones missing this money-lending bull market! It is very difficult while under
emotional pressure to take a view opposite to the prevailing opinion (Herd Instinct).


Bear Markets in
General
During a bear market, or when prices have been falling for some time, most markets will hesitate in their
down-moves and go sideways, or even start going up. Any low volume up-move is an indication of
weakness. You may also at times see what appears to be a test, which is normally a sign of strength. If the
test is genuine and indicating a true turn in a bear market, you will see an immediate response from the
professional money. The price will move up immediately with a slight increase in volume. However, if
the response to this indication of strength (test) is sluggish, or fails to respond over several days, going
sideways or even falling off slightly, this now shows further weakness to come. The test is discounted.
The logical conclusion of ‘lack of demand’ after a test is that the professional money is not interested in the
up-side of the market at that particular moment – they are still bearish!
You may not have seen weakness in the market, but the specialists and floor traders have. This weakness is
shown by a decrease in trading volume, as the stock or Index attempts to go up (no demand). The traders
that matter will have seen the weakness and will not be participating in the current up-move. This action
will confirm any signs of weakness in the background that you have detected.


What Stops a Down-Move & How Will I Recognise This?
High volume on a down-day/bar always means selling. However, if the day’s action has closed in the middle or high, then market-makers and other professional money must have attempted to buy into the
selling, or absorbed the selling (by buying), which then causes the market to stop going down. Marketmakers
will only buy into a selling down-day if the price levels have become attractive to them and the
trading syndicates have started to accumulate. The professionals are prepared to buy into the selling
(absorption) because large buy orders have arrived, which they can see on the other side of the book. We
do not have to be interested in the "whys" when we are letting the market action tell us what is happening,
which is the reason why your news feed will become redundant and an unnecessary distraction when you
have mastered the techniques of reading the market properly.

Absorption volume typically marks the end of a downward trend. It is characterised by a very high volume
bar that closes below the previous bar, on a wide spread. In normal circumstances, this would be construed
as selling, but the defining difference is that the bar closes on the high. If the high volume had represented
selling, how can the price action close on the high? There was a huge amount of buying (absorption) on
this bar. In this instance, the volume was extremely high and there was still a large amount of floating
supply, which accounts for the market drifting sideways before testing the high volume area for further
supply – the test shown by the rectangular signal after the absorption volume. The test serves a number of
purposes – it’s designed to check for floating supply, mislead the market, and catch stops on the long side
(i.e. to relieve traders of stock who are correctly buying into the move). At the point of the test, most of the
supply had been removed and the market was almost free to move upwards – it just required one last dip
down to remove the remaining latent supply.
You will have difficulty seeing absorption volume at the time it is happening, because your logical thinking
will be affected by the constant flow of bad news, and doom and gloom that will be circulating on the TV,
radio, newspapers and journals, internet chat rooms, forums and bulletin boards, not to mention your
friends and family. You will have to be a single-minded, contrarian thinker if you are to remain completely
uninfluenced by this tide of negativity – no-one said this was going to be easy!


How to Recognise a Market Bottom
• At point (a), we have a wide spread down on high volume, which is normally an indication of
weakness (selling pressure). However, over the next few days the market has not fallen – in fact it
is up. If the high volume seen at point (a) had been selling, how can the market drift upwards? To
be more accurate, there was selling at point (a), but for the market to have gone up, the selling
must have been 'absorbed' by professional traders. They will only do this if they have become
bullish. In this particular chart, we see the beginnings of an accumulation phase.
• At point (b), we observe an up-bar, but look at the volume: It is low. The market is unlikely to go
up on low volume (no demand), which is why the market now moves sideways. Low volume
shows that either:
1. There is a shortage of stock at this price level due to the absorption volume seen at point (a),
OR
2. The professionals who are accumulating stock have withdrawn from the market, as they do
not want higher prices – it is too early for them, as the floating supply has not been removed.
You have come to these logical conclusions because of point (a), which had to be absorption of the
supply, by professional traders (an indication of strength).
• At points (c) & (d) are small tests (see testing). Note the low volume at these points, which is an
indication that the tests were successful and that supply has been removed. The market cannot go
down on low volume. Taken in isolation the actions at (c) & (d) mean little, but because you have
seen absorption volume in the background, they now become strong buy signals.
Once you have seen very high volume on a down-day (or bar) on your chart, this shows high activity in the
market. If a rally starts due to the market-makers buying (or absorbing) the selling from weak holders who
are being shaken-out on the lows, the market will frequently re-test this high volume absorption area,
bringing the market back down into the reversal area (where the high volume was first seen) to make sure
that all the selling has, in fact, disappeared. You will know immediately if all the serious selling has
disappeared because the volume will be low as it penetrates back into the old high volume price area. You
would be wise to pay attention to this observation because it represents an excellent buy signal.
In summary, to mark a market down challenges the bears to come out into the open. The low volume of
activity shows that there is little selling left from the bearish side of the market. There is now an imbalance
between supply and demand caused by the recent shake-out (at point (a)). If there is little or no supply left
in the market, this clearly shows that the trading syndicates and market-makers have been successful in
their attempt to absorb selling from the weak holders, and that prices are now set to rise.


Professional Support
The following signs are indicative of professional support:
• A downward trend will already be in progress, and a down-day (or bar) appears, which closes in the
middle (or on the high), accompanied by very high volume, whilst the next bar is up.
If the bar closes in the middle (or high), we can surmise that demand is overcoming supply. Buying from
professional traders has entered the market and the activity on the previous day (or bar) has been high. On
this activity the market has not fallen, so the high activity must have been mostly buying. Note that the
volume must not be excessively high, because excessive volume may swamp the market, which even the
professional money cannot absorb.
Remember, you are dealing with professional activity. Low volume is telling you that they are either:
• not interested in buying on any up-move, or
• they are not selling on any down-move.
Have they seen something in the background you may have missed?
Ask yourself, "Why are they not buying or selling on this up-move?" Answer: Because they are bearish or
just negative on the market.
Alternatively, you may ask yourself, "Why are they not selling on this down-move?" Answer: Because they
are bullish!
I must emphasise that it takes professional money to alter the trend of the market. Professional traders will
not fight the market. They will duck and weave like a boxer, always ready to take full advantage wherever
possible. To fight the market means you are:
• buying on up-moves when there is supply coming onto the market and
• selling on down-moves when there is no supply.
Both of these tactics are very quick ways to go broke!


The Shake-Out
• At point (a), we have a startling shake-out. This is a potential indication of weakness taken in isolation. However, there is little, or no, major distribution phase in the background, which is normally indicated by high volume on up-bars near a market top. There is no buying climax in the
background either. If the shake-out at (a) was a major sign of weakness there would be weakness in the background.
There is no follow-through to the downside on the day after the shake-out – in fact the market has gone up! If the high volume had been bearish, the market would not go up.
• At the two points marked by (b), we have two classic 'tests' (see testing). However, look at the volume – it is high in both cases! The high volume means that we must judge the test to have failed. A successful test needs low volume, not high. At this stage, the market is not ready for an
up-move, as there is still supply present.
• At point (c), we have a reaction back down into the previous high volume area; the volume is now average to low – this is now a buy signal. Why is this? It takes selling pressure to go down and through the support seen at the 'shake-out' area. This pressure has now disappeared as is seen by the low volume. Point (d) is also a successful test that represents a buy signal. The volume is not higher than the test at point (c) and certainly lower than the two days at (b).

Here is another example of a shake-out:
Chart 41: The Shake-out (chart courtesy of VSA 4)
• At point (a), we have a high volume up-day, which constitutes effort to go up and through the
resistance to the left. However, there is no follow through; the market is reluctant to go up. If you
look closely, you will see that every up-day is on low volume, particularly noticeable at point (b).
Professional buying has withdrawn from the market (no demand).
• At point (c), we have the shake-out. You can see the tops better on this chart. There is no
distribution on the tops. Certainly, there is weakness, but no obvious distribution. At point (c), if
the high volume on the down-bar had been truly bearish (selling), how could the market go up
next day?
• At point (e), we have reacted back down into the same area of the 'shake-out‘. The volume is now
low (no selling), so the market is going to go up. Note at (f) how the lows are being supported
each day and the down-day is on low volume (no selling pressure). These indications mean little
in isolation but are great trading signals if you know you have a 'shake-out' in the background.
The shake-out worked very well because we were making almost new highs, but at a price level where
exactly two years before, we had the terrifying falls of the 1987 crash (Black Monday) which nobody had
forgotten. If, by any chance, you had forgotten, the television and newspapers were very busy reminding
you! Professional traders would have known only too well that this anniversary would help to do the trick.
A shake-out can be defined as is a sudden wide spread down, usually on bad news. It is engineered to
create panic selling, thus helping the transfer of stock back to the professional traders. This is usually seen
after a bull move has been running for some time. You would expect higher prices after this event. A true
selling climax looks the same as this shake-out does; the big difference is that on a selling climax you will
have a Bear Market behind you.


Falling Pressure
Falling pressure indicates that there are few sellers detected as the market goes down, shown by a wide
spread down on low volume, closing on the low. This is not a buy indication on its own, but shows a lack
of determined selling pressure as the market falls, and is an indication that the market is unlikely to decline
very much further. If the professional money were still bearish, there would be an increase in selling on the
down side, not a decrease.
This indication can become a buy signal if it closes on the high of the day and the lower price level has
penetrated into an old previous support.
Chart 43: Falling Pressure (chart courtesy of TradeGuider)
Caution
The volume can be lower on down-days during the very early stages of a bear market. Always
take note of background action! You will have indications of weakness in the background that
show a potential bear market. Falling pressure is seen when selling has been reduced. It is
always important to note what has happened in the background story, as this is what causes the
market to behave the way it does at the live edge (now).
Today's prices are always heavily influenced by either strength or weakness in the background.


Trading Hints & Tips
Trading is a skill that is different from being an analyst. You can be the greatest analyst in the world, but
calling the moves correctly is one thing, taking advantage of your analysis in the market is quite another.
There has been much written about trading by other writers and I will not try to better it. However, here are
some of the problems I have personally experienced and how you can overcome them.
Listen to the News, But….
Always say to yourself, "BUT..”. Is the professional element going to mark the market up or down on this
news, to better their own trading position? Is the market strong or weak? If the market looks strong, is this
apparent bad news giving you a chance to buy? What is the volume telling you? News can never change
the foundations that any particular move is based on. If the market has already seen substantial falls, is this
bad news going to finally shake the weak holders out of the market, allowing it to turn?
You will always see the specialist and market-makers playing around with the prices on news. This is
acceptable as long as you are expecting them to do this, and not surprised or taken in when it happens.
Do Not Fix Future Price
Targets in Your Mind
Listening to the so-called expert view on levels the Index may or may not reach at some future date (Gann
predictions immediately come to mind) does little to help your trading. It will limit your ability to trade
properly because you will tend to hesitate. Your thoughts will be clouded when indications appear that do
not agree with the view that has been subconsciously planted early on. You may say to yourself, "Not me,
I am above all that. I am never influenced by other people, rumours, news, or advertising”. You may truly
believe this, but your subconscious mind will certainly be influenced, which will affect your judgement.
If the views have been bullish and a higher price target has been predicted, you are unlikely to believe or
even see indications of weakness because you are not looking for them in the first place. Subconsciously
you are expecting higher prices, overlooking any possibilities of lower prices!
A good trader does not care if the market is going up or down, as long as he is trading on the right side of
the market and not fighting it. He will always trade with the trend. He also knows market-makers and
specialists frequently drive the market either up or down artificially and is waiting and looking for these very good 'extra' trading points.


Always Have a Plan
When you first start trading, it takes hard work and concentration to make money in the stock market and
keep it. As you gain more experience and follow good trading techniques it becomes easier. Planning
takes effort and concentration and needs to be reviewed constantly in the light of new information when
trading. You are then prepared to react immediately as a professional would. If you cannot be bothered
with this, you are liable to lose money and certainly will fail to make as much as you should do. Planning
also reinforces your own knowledge. It forces you to learn, perhaps reminding you of things you had
almost forgotten. Above all, it keeps you alert.
The majority of traders are not full-time professional traders. The correct times for them to buy or sell do
not occur that often. When they do suddenly appear you will have to react as a professional would, which
with no planning is very difficult. Professionals trade frequently so they are used to it. They usually have a
larger capital base and can spread their exposure in such a way that on bad days they are under far less
stress than the non-professional is.
Without a plan, you will rarely act correctly. You will be influenced by all the news and will be reluctant
to act because you are simply not ready. Therefore, you wait until you have more time to study the sudden
developments more closely. You are then reluctant to buy at higher prices, when you could have bought at
lower prices a few days before, so you finish up with no position, simply because you were not ready in the
first place. You had not planned to be ready.
Always Plan What You Will Do
If You Are Wrong
Most traders will go into the market with great optimism and fail to have any plan, because it does not enter
their minds that they may be wrong. If they thought that, they would not be in the market in the first place.
What do you intend to do if suddenly you are wrong? You are going to create problems for yourself unless
you have a clear plan in mind. Best of all: Write it all down before you trade!
It is not wrong to be wrong, but it is wrong not to recognise it immediately and to then cover your position.
Never trade unless you have plan 'B' ready and waiting to be activated without hesitation. This is a vital
part of a good trading system. All this preparation is difficult because you are fighting the urge to trade,
before you miss an opportunity. If you plan for a failure before each trade, you will be surprised how
successful you can become. As you have been reading this page you have probably been nodding your
head with agreement and perhaps thinking about your own refinements, but you will still go out and trade
on impulse. To be a good trader is not easy!
On the initial trade, place stops with great caution. Professional traders have your stops in a book in front
of them (or more latterly, on a computer screen) and will trigger them if possible. Once an up-move has
started, you should place stop-loss orders under the last reaction low. This is a safe position because the
reaction low forms a resistance level to any further down-moves. To trip your stop would require
substantial effort down and through the now established resistance level (effort is never free, it costs
money). For extra protection, place your stops on odd numbers, rather than even numbers. Professional
traders know you think in even numbers and will gun for the even numbers. Some traders even have buy
orders in at levels where most of the public will tend to place orders to sell, relying on the professional
traders going for stops, but picking up their buy orders at the same time at very favourable prices.


What are the Main Signs of Strength?
The primary signs of strength that you should look for at the bottom of a market are:
1. Testing is one of the best indications of strength. The prices will be marked down rapidly during the day, (or any other timeframe), but the price then recovers to close on the high of the day, and will be accompanied by low volume.
2. Any reaction back down into an area that had previously shown high volume, and is now showing low volume, is also a sign of strength (supply has disappeared in both cases).
3. Stopping volume is another good sign of strength – it results from huge blocks of buy orders that are large enough to stop a down-move, and is seen as a high volume down-day, usually closing on the highs.
4. A shake-out will also stop a down-move. Here, prices have gapped down and fallen alarmingly after a bearish move has already taken place. If the market gaps-up on the following day (or bar), you have all the signs of a shake-out, and a good sign of strength.
Generally, a strong market has no obvious signs of distribution behind it. There are no frequent up-thrusts and no very high volume up-days without any progress. There will be no rounding over of a market, where
the top looks like a mushroom. Furthermore, you will not see any narrow spread up-bars on high volume.
A distribution area will always have some of these characteristics, if not all, and will indicate a weak market. Note how you need to look at the overall picture rather than one day's action. For example, a test
on low volume is a very strong buy signal if you have a selling climax behind you, or the market is already in an uptrend. Exactly the same test, but this time with distribution or some other sign of weakness
immediately behind you means little. If you do see a test in these conditions and the market does not respond, or prices may attempt to rise on low volume after the test, then this gives you a great opportunity
to short the market, because you will be observing the signs of 'no demand' in a weak market and a possible market fall.


What are the Main Signs of Weakness?
The main signs of weakness are:
1. A buying climax.
2. An up-thrust.
3. A no-demand day (or bar).
4. A narrow spread, on an up-day (or bar), which is into new high ground, on very high volume. High volume present on an up-day (or bar), whilst the market falls on the next day (or bar), and this is no demand after signs of weakness. 
The professional money will be fully aware of any weakness in the market. If you see an up-move after
any signs of weakness, and the volume is low,
you will then have a potential short position.
In liquid markets, weakness frequently appears on very high volume, on an up-day (or bar), and on this
volume the Index or stock stops going up, moves sideways or even comes off. The high volume must hav
indicated an exchange of stock from the st
stock would not have stopped going up.
What else could the high volume possibly show? There is only one other possible reason, which is
absorption volume. This is representative of professional
from traders locked-into an old trading area to the left.
t this point I would like to digress slightly and take a closer look at the up-thrust, which is an impo A
indication of weakness, especially during a distribution phase, or after any indication of weakness.
This sign of weakness is hallmarked by a wide spread up during the day (or any timeframe), but then falls
to close on the low, on high volume. This action usually shows a weak market. If the high volume seen
was buying, then surely the closing price would be on the high not the low. The close on the low suggests
that there is more selling than buying contained in the high volume. It is a common sign of weakness
before down-moves. It also has a si
encouraging traders to go long.
Frequently, one sees a second type of up-thrust, which is seen after a substantial decline of a stock or Inde
has already taken place. The action is exactly the same, but this time the volume is low. These are traps
created by the market-makers to catch the stop-loss orders of the short traders. On seeing an up-thrust, a
short trader will cover his position, or may even buy. People waiting for so-called breakouts to the up-side
will buy on an up-thrust – it is these traders who will be caught out by this move.


Checklist for Going
Long (Buying)
When you are still on your learning curve, it is a good idea to have a checklist. The checklist should be
part of your plan (trading set-up) and should be referred to on any urge to trade: The following suggested
checklist is for long positions (please add your own refinements):
• If you are using TradeGuider, are there green indicators present? If the answer to this question is
“Yes”, then this is a positive indication.
• Can you recognise the early stages of an upward trend? If you are using TradeGuider, you can turn on
the ‘instant trend’ indicator (the diamonds should be green). Also look at the colour of the bars – these
should also be green. On any reaction, if the low is higher than the last reaction, this is an uptrend.
• Is there persistent daily support? The low of each day (or bar) should be higher than the previous day
(or bar). This is a sign of strength (the lows are being supported to encourage the rally).
• Are you chasing the market? Caution, in a strong market, you should be buying on any reaction on
low volume.
• Are there signs of strength in the background?
• Are there signs of weakness above you? Be cautious.
• Is a selling climax going on today? This is a rare occurrence – trade now only on any down-move with
low volume
• Is there a narrow spread with high volume on a down-day? (Must close on lows). This is a sign of
strength.
• If you are using TradeGuider – are there red indicators close by? Caution, but look for a test to buy on.
• Where is your stop-loss order?
Avoid even numbers when placing your stops – market-makers will know where your stops are.
Above and below any actively traded market are not hundreds, but thousands, of stops. The
professional traders will gun for these stops, especially during periods of thin trading activity, as
this represents an excellent moneymaking tactic. Avoid even numbers and place your stops away
from the crowd if possible. The best place to position a long stop is at a point where you have
seen a reaction and then continued up. Your stop is now safe because there is a resistance area that the floor traders will find difficult to reach.

• Is there a test with low volume today in a rising market? This is a sign of strength.
• Are you in the middle of a trading range? Be careful – only initiate a long trade if you are sure that the
background action is strong.
• Have you drawn your own trend lines on the last two points of support or supply? Are you trading in
harmony with this trend?
• Are you bucking the trend or trying to pick the turns? Be cautious – this is only a good idea if you
know what you’re doing,
• Is the market over-bought? (Indicated by the price moving above the top trend line in a trading
channel). If so, be cautious – the market may now reverse direction back into the trading channel.
Here are a few things to be aware of whilst trading:
• Are you fully aware that the market-makers or specialists can push the market around to get you into a
poor trade or out of a good one?
• Are you going to trade on facts or a hunch? Have you assumed you are wrong? So what are your
plans?
• Are you going to listen to the news rather than looking at the facts? This is a dangerous pastime when
speculating on the markets. Unless you are very lucky, you are going to lose.
• Are you going to trade on impulse? If so, this is very dangerous. You will have to be ready to switch
your position immediately if there is any indication of weakness. (Never wait hoping to get out of a
poor position later).
• Are you specialising or looking at multiple trading choices? It usually pays to specialise in a limited
portfolio.
• Always trade in harmony with the Parent Index.
• Look at all three Indices (UK markets) – FTSE100 – FTSE100 with total option volume – FTSE100
Future. Each one will tell you a story. If you trade the US markets, then the same approach can be
adopted for the Dow, S&P, or NASDAQ indices.
• If you are dealing in stocks, your selection should be acting stronger than the Parent index. If you have the TradeGuider software, use the stock scanner feature to identify the strongest and weakest stocks.


Checklist for Going
Short (Selling)
The following suggested checklist is for short positions (please add your own refinements):
• If you are using TradeGuider, are there red indicators present? If the answer to this question is “Yes”,
then this is a positive indication and you should be looking out for other signs of weakness.
• Can you recognise the early stages of a downward trend? If you are using TradeGuider, you can turn
on the ‘instant trend’ indicator (the diamonds should be red). Also look at the colour of the bars –
these should also be red. On any correction, if the low is lower than the last correction, this is a
downtrend.
• Is the market constantly falling on no support? The low of each day (or bar) should be lower than the
previous day (or bar). This is a sign of weakness (the market is not being supported because there is
no professional interest in the upside).
• During an established bear market, be pessimistic, even if a rally appears to be going on. Bear Markets
usually run longer than you think they will.
(For TradeGuider users:)
• Are green indicators present which result in the price showing an immediate upward response?
Caution, the market has responded to what might be a bullish indication.
(For TradeGuider users:)
• Are there any low volume up-bars following a green indicator? This is a sign of weakness.
• Is the market oversold? (i.e. The price is moving below the bottom trend line in a trading channel). It
would be inadvisable to short in this situation.
• Is the market in an upwards trend? You should be very cautious if shorting in an uptrend.
• Is there a successful test in background? Be careful, it would not be wise to short.
• Is there stopping volume in the near background? It would be very risky to short in this situation.
• Is there a selling climax in the near background? This is a significant sign of strength, so shorting in
this situation would be extremely dangerous.
• Do you want to short on a down-day? It is extremely unwise to chase the market. True weakness
always appears on up-bars.
• Can you see a ‘no demand’ up-day (or bar), following signs of weakness? This is a good place to short.
• Can you see any bars that have a narrow spread, accompanied by high volume (on an up-bar), after a
substantial up-move has already taken place? This is a weak sign (add more weakness if the price is
into new high ground – no trading areas to the left)
• Is there an up-thrust today? This is a sign of weakness, especially on a downward trend.
• Are you putting yourself into a position where you will be unable to monitor your trade? If this is the
case, you are being extremely unwise.
Here are a few things to be aware of whilst trading:
• Are you fully aware that the market-makers or specialists can push the market around to get you into a
poor trade or out of a good one?
• Are you going to trade on facts or a hunch? Have you assumed you are wrong? Always have a plan of
action and stick to it.
• Are you going to listen to the news, rather than look at the facts on your charts? This is a dangerous
pastime when speculating on the markets. Unless you are very lucky, you are going to lose.
• Are you going to trade on impulse? If so, this is very dangerous. You will have to be ready to switch
your position immediately if there is any indication of weakness. (Never wait, hoping to get out of a
poor position later).
• How many points are you prepared to lose if the trade fails?
• Have you been influenced by the 'news' or the remarks of others?