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Wyckoff Market Discussion (3+ months) - Use Once
A Detailed Look Into Springboards
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Beyond Springs And Upthrusts
High-Probability Wyckoff Trade Set-Ups
Improving Your Wyckoff Swing Trading Results
Intraday Trading Using The Wyckoff Method
Long-Term Campaigns and Tactical Swing Trades
Momentum, Volume And Price Structure
Point-and-Figure Part III
Practices For Successful Trading
Scan For Success Part 1
Scan For Success Part 2
Swing Trading Using The Wyckoff Method
Trading Technical Analysis Signals
Trust the Process (2019)
Upgrading Your Trading Plan (2018)
Wyckoff Market Discussion (3+ months) - Use Once
Wyckoff Market Discussion (3+ months) - Use Once
A Detailed Look Into Springboards
Back-Testing/Validating Trading Plan (2017)
Beyond Springs And Upthrusts
High-Probability Wyckoff Trade Set-Ups
Improving Your Wyckoff Swing Trading Results
Intraday Trading Using The Wyckoff Method
Long-Term Campaigns and Tactical Swing Trades
Momentum, Volume And Price Structure
Point-and-Figure Part III
Practices For Successful Trading
Scan For Success Part 1
Scan For Success Part 2
Swing Trading Using The Wyckoff Method
Trading Technical Analysis Signals
Trust the Process (2019)
Upgrading Your Trading Plan (2018)
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3/3
2020
Supply and Demand: The First Law.
by John Colucci

Welcome back fellow Wyckoffian structural scanners.  Hope everyone has absorbed (pun intended) all the great stuff out there on the three (3) Wyckoff Laws.  Trust me, it pays to know the Law! As promised, let’s look into the first Wyckoffian Law: Supply and Demand.

Supply and Demand defined

When we speak of Supply and Demand, what do we mean?  Supply and Demand as concepts have always seemed a bit nuanced for me and sometimes, my brain feels like it just can’t get enough traction on the subject.  Throw in volume and well, it can be just plain daunting. Lets start with the basics: working definitions.

Supply.

The word “supply” has different linguistic purposes: the word can function as either a verb (to supply) or a noun (a “supply” of shares). In the economics world, “supply” can mean the quantity of a commodity that is in the market and available for purchase or that is available for purchase at a particular price. (Courtesy of Dictionary.com.)  For our purposes, lets define “supply” as the quantity of stock available for purchase at a given price.

Demand.

“Demand” likewise has different linguistic functions and can also be a verb or noun. As a verb, “demand” can mean “to ask for or claim as a right.” As a noun, in an economic context, “demand” can mean “desire to purchase, coupled with the power to do so.” Courtesy of Dictionary.com.

Let’s run through a couple of Supply scenarios.

  1. Institution A holds 100 shares of XYZ Co. that it intends to hold forever. Are these shares considered “supply”?
  2. Institution A holds 100 shares of XYZ Co. and intends to hold until the price is 10% more than the current close to maximize investor returns for the quarter. Are these shares considered “supply”?
  3. Institution A holds 100 shares of XYZ Co. that it intends to sell today at the market open at whatever price is available. Are these shares considered “supply”?

Jot your answers down and we will circle back to these questions later.

Let’s run through a couple Demand scenarios:

  1. Institution B is flush with cash and would like to purchase 100 shares of XYZ Co. at the market open at whatever price is available. Is this part of “demand”?
  2. Institution B wants to expand its position in XYZ Co. by 100 shares but needs additional investor capital before it can make the purchase. Is this part of demand?
  3. Institution B has money to put to work but doesn’t like XYZ Co., and thinks it has no value at any price. Is this part of demand?

Supply and Demand in Action:

This was supposed to be simple! Supply is greater than demand, price goes down.  Demand is greater than supply, price goes up.  Now it looks like perceptions of value, access to capital, quarterly returns, and a host of other factors all influence Supply and Demand.  How do we make any sense of this?

Lets go back to our definitions and refine things a bit. Both Supply and Demand are influenced by many factors, but in the most immediate (and restrictive) sense of the terms: the shares available at the current market price represent “supply” and the share desired by “monied” buyers represent demand—let’s call that “current supply” or “current demand.” For the time being, consider the rest “latent supply” or “latent demand”.

What the heck is this “latent” nonsense. Well “latent”, under at least one definition, means “existing but not yet developed or manifest, hidden or concealed.” (Courtesy of Google).  Chew on that for a minute and think about our CO narrative, including stealthy accumulation and distribution of shares.

If we assume that events and perceptions can pull latent demand/supply into current supply/demand and vice versa, then perhaps supply and demand are contextual based on price and other factors.

Supply, demand and price all interact together. For example, think about supply and demand dynamics at support (lower price) and resistance (higher price). Price move up off support (demand prevails) and price moves down off resistance (supply prevails): wow, that sounds a lot like our Phase B testing!

Lets take a look at a few things to hopefully clear up Supply and Demand just a bit more.

First, take a look at a price ladder or DOM (digital order management) screen:

 

This is the TD AMERITRADE Think or Swim DOM for the /NQ (Nasdaq futures contract). The grey box is the last trade price, the lowest darker red box is the “Ask” or the lowest price a seller will take for its contracts AT THAT VERY SECOND.  The highest darker green box is “Bid”: the price a buyer will pay for a contract AT THAT VERY SECOND. The difference between the Bid and Ask is the “spread”.  As you can see, the size of the bids in first three green boxes (demand) match up almost identically with the first three the Ask red boxes (supply).  At that very instant there is a rough balance of supply and demand with the last trade moving down to the bid price. 

In the case of the last trade depicted above, a seller “hit the bid” by reducing its asking (the amount it will accept for its contract) price to the highest bid available at that instant. Once the seller “hit the bid”, a trade happened, and volume was added to the register of transactions.

See if you can find a DOM (ladder) to check out, Level II quotes, and even Time/Sales screens can help here.  Spend some time watching Supply and Demand in action: once you get used to the movement, it’s fascinating.

Here is the /NQ continuous contract 30 minute chart showing the price action surrounding the previous DOM illustration:

The DOM image was captured at 8:54 am, December 3, 2019. What was happening to price between 5 am and 9 am on December 3, 2019?  Down!! It is any wonder sellers were willing to reduce their prices to exit their positions.  What does this price movement show about the Supply/Demand relationship at that time and those prices?

Supply exceeded Demand between 5 am and 9 am on December 3, 2019.  Why? Perhaps a negative comment on the prospects for world trade moved the Supply/Demand needle. (Check the chart note for President Trump’s trade comments at the NATO conference in London—London traders are among the best and they reacted!). A negative development (fear) brought otherwise content NQ owners off the fence as sellers.  At that time, there were more sellers than buyers, so what would we expect from price?

Certainly, Supply and Demand exist in the minute, current, latent or whatever. Supply and Demand can jump around like a bucking bronco and a rush for the exits just a tweet away. However, if we step back and think of Supply and Demand in a larger context, perhaps a trending context, a little clarity in the chaos might emerge.  Thinking of Supply and Demand as trending concepts (dare I say waves) can simplify things for us.

An intimate understanding of Supply and Demand is essential for overall trader development. However, a broader understanding and context for Supply and Demand is more important for scanning. 

As price generally moves higher, demand is generally greater that supply.  As price generally moves lower, supply is generally greater than demand.  If price moves sideways for a period, then a general equilibrium area for supply and demand exits.

We can run down the rabbit trails of why, tweets, earnings reports, etc., but for Wyckoff Structural Scanning, a longer term (more than a minute anyway) perspective on Supply and Demand is our focus.  If we want to understand the Supply/Demand dynamics of a particular stock, where do we look: price movement on a chart! Trends in price are trends in Supply and Demand.

Circling Back. 

Let’s talk supply and demand in the new Wyckoff Analytics Forums.  If you get a chance, send in your thoughts on our Supply/Demand discussion and let’s see where we go.  Perhaps we can reach a consensus on what is properly considered supply and demand: Trust me: the advantageous use of supply and demand is at the top of the CO playbook.

Coming Up.

Next time, we will continue our discussion of Supply and Demand and begin the process of translating Supply and Demand into concepts that highlight Wyckoff Structural Scanning components.

See you next time.

Scan well, trade better!

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