Two Anomalies!

This is two anomalies in one. The price spread is wider than the previous candle, but the volume is lower. The buying pressure is draining away. Second, we have a market that is rising, but the volume has fallen on this candle. Rising markets should be associated with rising volume, NOT falling volume. This is also signalling clearly that the previous volume is also an anomaly, (if any further evidence were required).

Candle 4 Two Anomalies Again!

Again, we have two anomalies in one, and is adding further confirmation that the volume and price on this trend are no longer in agreement. Here we have a wide spread up candle and even lower volume than on previous candles in the trend. Following the effort vs result rule, we would expect to see significantly higher volume, but instead we have low volume.

Second, the falling volume is confirming that we have an anomaly on the trend, as we expect to see rising volume with a rising trend, whereas here we have falling volumes on a rising trend. The alarm bells would be ringing loud and clear now. What are the conclusions we can draw from these four candles? The problems start with candle two. Here we have effort, but not an equivalent result in terms of the associated price action. This is therefore the first sign of possible weakness. The

market is what is known as 'over bought'. The market makers and specialists are starting to struggle here. The sellers are moving into the market sensing an opportunity to short the market. This creates the resistance to higher prices at this level, which is then confirmed on the third and fourth candles, where volume is falling away.

The specialists and market makers have seen this weakness, and are selling out themselves at this level, preparing for a move lower, but continue to mark prices higher, to give the appearance of a market that is still bullish. It is not. This may only be a temporary pause, and not a major change in trend, but nevertheless, it is a warning of potential weakness in the market.

The high volume is as a result of an increasing number of sellers closing out their positions, and taking their profits, whilst the remaining buyers do not have sufficient momentum to take the market higher. The specialists and market makers are also selling out at this level adding to the volumes, as they have seen the weakness in the market. This is the reason that volumes fall on the next two candles, as they continue to mark the market higher, but are no longer involved in the move themselves. They have withdrawn and are trapping traders into weak positions.

The initial weakness appeared on candle two, which was then FURTHER confirmed by candles three and four. This is often the sequence of events that unfolds.

Initially we see an anomaly appear using the single candle analysis. We then wait for subsequent candles to appear, and analyse them against the initial anomaly. In this case, the anomaly was confirmed, with prices continuing to rise on falling volumes. Now we have a market which is apparently weak, and confirmed as such. The next step is to move to the final level in our analysis which is to consider the analysis in the broader context of the chart. This will determine whether what we are seeing is a minor pull back, or the pre-cursor to a change in trend.

This is where Wyckoff's second rule comes into effect, the law of cause and effect. If this is simply a minor pull back or reversal, then the cause will be small, and the effect will be small.

In point of fact, the anomaly we have seen here, might be enough to result in minor short term weakness, a pull back due to one weak candle. The cause is weak, so the effect is weak. Before expanding further on this latter in the book, let us look at one more example of multiple bar anomalies.

Fig 4.17 Multiple Bar Anomalies I"15 Anomaln A Downtrend

In the example in Fig 4.17 we have what is known as a price waterfall, where the market sells off sharply.

The first candle opens and closes, and is associated with low or relatively low volume, which is as we expect. We then start to see the anomalies starting with the second price bar in the waterfall.

Candle 2 Anomaly

The candle has closed with a marginally wider spread than the previous bar, but the volume is high or very high. What this is signalling is that the market is clearly resistant to any move lower. After all, it this was NOT the case, then the price spread would he been much wider, to reflect the high volume. But, this is not the case, and is therefore an anomaly. And, just as in the previous example, the alarm bells are now ringing. What is happening here is that bearish sentiment is draining away with the sellers now being met with buyers at this level. The market makers and specialists have seen the change in sentiment with the buyers coming in, and are

moving in themselves, buying the market at this price point.

Candle 3 Two Anomalies

Now we have two anomalies, similar to the example in Fig 4.16. First, we have a wide spread candle, but with only average to low volume. Second, the volume is lower than on the previous bar – in a falling market we expect to see rising volume, NOT falling volume. With falling volume the selling pressure is draining away, something that was signalled in the previous bar.