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To decipher a naked chart (CL 89 tick from Feb. 2th, 04:34 EST), a chart without indicators and in this case even without time- & price axes, is very challenging to say the least. One tries to forecast future price movement but after a while studying the chart one sees indications that price might go up but also indications that price might go down. Who knows? Where to start and what to look for?
It's like looking at the National Leaders Tree picture. At first glance you will see a tree and two faces. If someone would ask you how many more faces you can see in this picture you eventually will come to ten faces. Once you see it it's impossible to unsee it. Same with chart reading, you need to learn what to look for.
National Leaders Tree
Luckily we can resort to the writings of traders from long time ago and from traders not so long time ago. Through a life long dedication, observing and studying the markets, they gained a wealth of knowledge and experience we can make good use of.
Wyckoff wrote: "Charts have actual forecasting value because they indicate supply and demand (pressure and support), the volume of trading and the time factor. They form a concrete record of the forces lifting and depressing prices. There is nothing so good for this purpose as charts."
And: "The Time Factor is also important because it enables us to estimate the speed of the advances and declines — whether the buying or selling is urgent or leisurely; whether it is slow or rapid accumulation, or distribution."
"Whenever you study the tape or a chart, consider what you see there as an expression of the forces that lift and depress prices."
Wyckoff taught us to think in waves: "In studying the distance and duration of each wave, if the buying waves are longer in duration and travel further than the selling waves, we get an indication that the immediate trend is upward. If the selling waves exceed the buying waves in time and distance, the immediate trend is downward. Whenever the buying and selling waves seem to offset each other and no material strength or weakness is indicated, the immediate trend is in doubt. Our position should then be neutral."
Another trader, from not so long ago, is David H. Weis. David used the writings of Wyckoff and took the so called Wyckoff method to a higher level. Almost 100 years after Wyckoff put his knowledge to paper David renewed the attention to the Wyckoff method making it more easily available and adding his Weis Wave, an outgrowth of Wyckoff's tape reading chart.
In his excellent book " Trades About to Happen" David wrote: "first, we will focus on the lines. Reading a chart without lines is like studying a world map without boundary lines". Later on he continued to show how to read the forces in the market by using his Weis Wave.
So we start by adding lines. Using only lines we can construct chart 1. By just adding some lines the chart suddenly becomes more "readable". Again, we try to decipher who is in charge, the buyers or the sellers. We want to join the major force. On chart 1 we can identify a trend channel. Price breaks out of this channel and test the breakout making a new high. High prices attracts sellers and from this new high supply comes in printing a down wave (the action) exceeding the last buying wave in time and distance. Just like Wyckoff taught us to look for. Just based on this observation one should already think to go short. Can it be just a consolidation phase before continuing the trend. Yes, sure, and sometimes it does and we will book a small loss.
Next we do is we examine the buying power (the reaction) on the next swing up. Chart 2 is how David liked to display his waves. A 1.2K volume on the wave up to the high signals climactic buying. The 1.7K volume on the next down wave showed supply followed by just 193 & 208 contracts traded on the subsequent up waves. No demand, go short, David would say. He liked to hide the bars and look only at the waves with their respective volume, see chart 3.
To quote Wyckoff once again: "Successful tape reading is a study of Force; it requires ability to judge which side has the greatest pulling power and one must have the courage to go with that side. There are critical points which occur in each swing, just as in the life of a business or individual. At these junctures it seems as though a feather’s weight on either side would determine the immediate trend. Anyone who can spot these points has much to win and little to lose".
Two reactions, both are spot on with respect to Wyckoff. But sorry guys, I wanted to show something else. Something I think it's important to realize. Something you won't see in books or courses. I agree, a near perfect accumulation phase near a support level (YL) ready for markup. I have seen it work out hundred's of times. It's not that difficult to find these kind of patterns. Especially after market close (pun intended). However finding them real-time in different markets across different time frames requires a lot of screen time & practice. Once found, trading it live is a challenge on it's own. As a matter of fact I bought this market. It could have ended in disaster. Freezing, hoping and then the inevitable margin call. Experience is speaking.
Chart 2 is what happened. Crude Oil is bullish, not? That's $2 down in 30 minutes, $2K per contract, ough. This is what most sellers from Wyckoff courses, the pundits, won't show you and what makes people lose their money, and their faith.
I was looking to go long for a mean reversion trade with targets VPOC, PVPOC, PVAH, YH and further, or in crypto terms, to the moon.
Anyway, was there a way to foresee the sell-off?
Price is consolidating around PRL (y-day's low) and is below PVAL & VWAP which is bearish. I am trading a reversal (mean reversion) looking for price to get back into value, by definition counter-trend. I think it's difficult to foresee such a sell-off, which is often triggered by news, although there was something of a minor clue and that is that after the SOS price had two attempts to go higher and failed. Price was struggling at the third attempt, small bars at VWAP, before a larger bear bar brought price right back to the range, and then all the way to the low of the range where it broke down to find buyers.
This is why we always, always use a stop. Max just below the last swing low, just inside the range. We prevent major damage to our bankroll and are free to re-examine the situation, maybe going short.
Mark Douglas said "Anything can, and will, happen". That's good to remember. Last chart, chart 3, is where I got out. Thank god. You have been warned.
p.s. later on the day there was a nice reversal back to VWAP (on the 1m) from 10:55 EST onward till 12:57.
Edit Oops - guess I was a bit late with this. I generally try not to look at what others have written so I don't get influenced, but I'll leave this up here since I think it makes a great lesson -> admitting when you are wrong was a big part of this quiz...
I'm saying up. The range that develops after the selling climax is broken by the strong move up while making HL's and the last mini-range represents the test of this breakout.
