How to identify a climate event in the markets and benefit from it
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It is the second event of the methodology and appears after the stop attempt in the Preliminary Support/Supply.
In the cumulative examples we will call it Selling Climax (SC) while for the distributive structures we will label it Buying Climax (BC).
After the appearance of a large volume after a prolonged trend (potential standstill), we will be attentive to the possible identification of this climatic event. As we always say, this is one of the greatest benefits of the Wyckoff methodology: it provides us with a market context. We know what to look for.
But one important thing to keep in mind is that Preliminary Support/Supply events do not always appear within the sequence and their function can be performed at the same time by the climax event. That is why we insist time and again on the importance of giving the market some flexibility. We have a context and a basic sequence but it is necessary to allow the market to express itself freely, without trying to force it into our map, because wanting to exercise control over the market would be a mistake. The key to determine if we are directly before the climax will be obtained from the price; it will be necessary to see a strong reaction (Event No. 3) and a test (Event No. 4) that give the end of Phase A stopping the trend.
Keys to climax
Two things can happen after the weather event; a reaction (Automatic Rally/Reaction) or a lateral movement. If a reaction appears, it will be followed by a Secondary Test; conversely, if a lateral movement takes place, the market will most likely continue in the direction of the previous trend.
A very relevant aspect is that this event needs to be tested to verify its authenticity (with the Secondary Test). A much lower volume in a subsequent test shows a decrease in selling pressure.
This event is known as “No Supply” and “No Demand” within the VSA (Volume Spread Analysis) approach.
Something very important to emphasize is that the climax will not necessarily be the greatest end of the structure. During the development of the same we could observe several tests (failed attempts to make minimums lower or maximums higher) during Phase B as well as the test event in Phase C (Spring/UTAD) that normally shakes the end of it.
How it appears on the graph
Although the principle does not change; it can manifest itself in different ways in terms of price and volume representation (see graphs 38 and 39).
There is a prevailing belief within the world of price and volume analysis that this event should be viewed as a bar with increasing volume and expanding ranges. Even if this definition were correct, it would be incomplete because there are other forms of representation.
On the one hand, it can be seen on a set of bars with a relatively narrower range and with a high and constant volume during all of them. Another way would be on a single bar with high volume and a large wick at the bottom.
All these representations in the end denote the same thing: strong entry of buyer interest on the part of the large operators.
Regardless of the characteristics of the weather event, when we look at the genuine Automatic Rally/Reaction and Secondary Test, we will automatically label the previous movement as Climax.
This Selling Climax event is in the background similar to the Preliminary Support event. Both the way it can appear on the graph and the psychology behind the action are exactly the same. Also initially we must treat it as Selling Climax potential since the confirmation will arrive to us when the two later events appear that confirm the end of the Phase A (Automatic Rally and Secondary Test).
The Selling Climax is a very powerful sign of strength. After a period of falling prices, you will reach a point where, supported by very negative news, the market will plummet rapidly. At that point, prices are now attractive for smart money and will begin to buy or accumulate at those low levels.
Selling Climax occurs after a significant downward movement. This is the second event to appear after the Preliminary Support and takes place within the Phase A stop of the previous bearish trend.
This climatic movement is generated by three reasons that we will detail next and that together provoke a snowball effect for which the price does not stop falling.
Within the Wyckoff methodology it has special relevance since with its appearance we can begin to define the limits of the range; and it is that its minimum establishes the lowest end of the structure (support zone).
The psychology behind the Selling Climax
If we remember, due to the very nature of markets; for someone to be able to sell, someone else must have been willing to buy. So, it’s a good idea now to ask ourselves, for example, who will be taking over all that sales and what makes him do it.
Logic leads us to think that who is buying is the big operator since it is he who has the capacity to move the market and stop an abrupt fall.
He has probably determined that the price is “cheap” and is happy to start a campaign in this area to accumulate stock.
What are the reasons that lead the ill-informed operator to provide the liquidity that large operators need with their sales? We remember the origin of those liquidity providers already seen in the stop event:
- The greedy. There will be a group who see the price fall and for fear of losing the downward movement enter with short positions.
- The fearful. Another group, usually with medium- to long-term positions, will have stockpiled and will have withstood much of the fall. They find themselves in losses and when they see the price fall again, for fear of further increasing the loss, they finally decide to abandon their position.
- The smart ones. A last group of traders, believing themselves to be the smartest in the class, will want to anticipate the bullish turn and at that point they will probably already find themselves with buying positions. This third type of sales occurs when the protection stop of these positions is skipped.
The Selling Exhaustion
A downward trend will not always end with a climatic volume. There is another way to come to an end and it occurs when the sale that is controlling the condition of the market is gradually disappearing.
Sellers stop being interested in lower prices and close their positions (take profits). This lack of aggressiveness of the shorts would create a potential market ground for exhaustion.
Obviously, this disinterest will be represented on the chart with candles of normal or narrow range and average or even low volume.
The curious thing about this action is that, even if we are not facing a climatic event that precedes the end of a trend, within the labeling of the structure we would continue to identify that minimum as the Selling Climax.
It must be made clear that the methodology originally did not treat this action as such Selling Climax; and it makes perfect sense because at no time did we observe this characteristic climax.
Although we always advocate treating market actions from a functional point of view, on this occasion we must observe this exhaustion from an analytical point of view in order to frame it within the structure’s etiquette.
Perhaps we could propose to the whole Wyckoffian community a new event that would identify this end of the downward trend due to exhaustion. Something like “Selling Exhaustion” could be representative of the action you are referring to.
To emphasize of the Selling Exhaustion is that a signal of its possible appearance we obtain it when the price develops continuous actions of Preliminary Support every time lower.
Climatic actions will be observed as the downward movement develops where the overall volume is likely to decrease. This suggests that there is an absorption of sales where professionals have stopped selling aggressively and begin to take advantage of the bearish continuation to take profits from their shorts.
This can cause that market floor to develop without seeing above the last minimum an expansion in price ranges and volume. We will be before the new Selling Exhaustion.
Uses of Selling Climax
The identification of this event is very important because it signals intelligent purchase; purchase by professionals and therefore it is a demand for quality.
What advantage can we gain by correctly identifying this event? As it is a stop action of the previous bearish movement and indicate the entry of quality purchase we can draw two clear conclusions:
- We must stop thinking about the short side at least until we later confirm a redistribution scheme.
- We are facing the last clear opportunity to take profit from sales positions if we did not do so on the Preliminary Support.
It is not recommended to start buying positions at this point as the risk assumed would be too high. However, it is true that some of the most experienced Wyckoff traders take advantage of this type of context to take short profit buying operations looking for the bullish rebound towards the Automatic Rally.
Buying Climax is a powerful sign of market weakness. After an uptrend, the price, guided by favorable news and a buying irrationality on the part of the participants (ill-informed) will cause a rapid rise.
At this point, the market will have reached an uninteresting level to stay within, and well-informed traders will abandon their buying positions and even begin to position themselves short expecting lower prices.
The Buying Climax is the second event that appears after the Preliminary Supply and takes place within the Phase A stop of the previous bullish trend.
This climatic movement is originated by professional operators capable of initiating a price shift; and is followed by ill-informed operators who make their operational decisions generally on the basis of their emotions.
It’s a trap. A deception where it seems that one is buying with a certain aggressiveness when in reality the intention behind it is totally the opposite. All purchases are being blocked with sales orders. The price cannot go up because someone with the ability to do so is absorbing all that stock.
With the appearance of the Buying Climax we begin to define the limits of the range; and it is that its maximum establishes the upper end of the structure (zone of resistance).
The similarities between Preliminary Supply and Buying Climax are total. Both the way it can appear on the graph and the psychology behind the action is exactly the same. The only difference between the two events is that Preliminary Supply fails to stop the previous uptrend, while Buying Climax does (at least temporarily).
Initially we must treat the Buying Climax as potential, since the confirmation will come to us when the two subsequent events appear confirming the end of Phase A (Automatic Reaction and Secondary Test).
The psychology behind Buying Climax
Surely the great professional has determined that the price is in a condition of over purchase and is happy to start in that area a campaign to distribute stock in order to bring prices lower.
What are the reasons that lead the ill-informed operator to provide the liquidity that large operators need with their purchases? We recall the origin of those liquidity providers seen above:
- The greedy. Professionals get counterbalance here by aggressively buying the greedy, who enter the market for fear of missing the next move.
- The fearful. They are those who hold selling positions from below and are at a loss. When they see the price rise again, they can no longer withstand the pressure and decide to liquidate their position. Purchases that need to marry sales (that of the big operators).
- The smart ones. Trying to anticipate the bearish turn they will have already positioned themselves short. In this case, the sales that professionals need are obtained from the stop jumping of these positions.
The Buying Exhaustion
An upward trend will not always end with a climatic volume. There is another way to come to an end and it occurs when the purchase that is controlling the condition of the market is gradually disappearing.
Buyers stop being interested in higher prices and close their positions (take profits). This lack of aggressiveness of the lengths would create a potential market ceiling due to exhaustion.
Obviously, this disinterest will be represented on the chart with candles of normal or narrow range and average or even low volume.
Although this action does not have the common characteristics of climatic events, within the methodology it is still labelled in the same way. That is why it would be interesting to differentiate between a climax stop and an exhaustion stop.
The proposal that is launched to the Wyckoffian community is the creation of a new event that serves to identify this end of the upward trend due to exhaustion. In this case, “Buying Exhaustion” seems to us to be the most suitable label.
One sign that we are possibly going to identify a Buying Exhaustion is the appearance of continuous higher and higher Preliminary Supply actions.
Potentials Preliminary Supply will be observed where overall volume is likely to decrease. This suggests that there is a gradual absorption of purchases where professionals have stopped buying aggressively and begin to take advantage of the bullish continuation to take profits from their lengths.
This can cause that market ceiling to develop without seeing above the last maximum an expansion in price ranges and volume. We’ll be looking at the new Buying Exhaustion.
Uses of Buying Climax
The identification of this event is very important since it points out the absence of intelligent purchase; there are no professionals with interests above.
What advantage can we gain by correctly identifying this event? As it is a stop action of the previous bullish movement and indicate the entry of quality sale we can draw two clear conclusions:
- We must stop thinking about the long side at least until we later confirm a reaccumulation scheme.
- We are facing the last clear opportunity to take profit from purchasing positions if we did not do so on the Preliminary Supply.
It is not recommended to start selling positions at this point as the risk assumed would be too high. However, it is true that some of the most experienced Wyckoff traders take advantage of this type of context to take short profit trades by looking for the bearish rebound towards the Automatic Reaction.