Discover the Event that signals the First Entry of Smart Money into the Market
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This is the first Wyckoff method event that appears to initiate the Phase A stop of the previous trend.
In the case of accumulation schemes, it is called Preliminary Support (PS), which together with the Selling Climax (SC), the Automatic Rally (AR) and the Secondary Test (ST) produces the change in character with which it makes the price evolve from a downward trend environment to a lateralisation environment.
In the example of the distribution structures it is called Preliminary Supply (PSY), which in conjunction with the Buying Climax (BC), the Automatic Reaction (AR) and the Secondary Test (ST), puts an end to Phase A, stopping the previous upward trend and initiating Phase B, the construction of the cause.
As we know, the processes of accumulation and distribution require time and on rare occasions the price will develop a hypodermic scheme visually leaving a V turn. This accumulation process begins with this first event, with Preliminary Support and Preliminary Supply.
Before this event takes place, the market will find itself in a clear trend. At some point, the price will reach a level attractive enough for large traders that they will begin to participate more aggressively.
The observation of this event on the chart is generally misinterpreted as it is not necessarily necessary to observe a bearish bar with increased volume and expansion in the ranges.
It can also be seen on a set of bars with a relatively narrower range and a constant high volume during all of them; or even on a single bar with high volume and a large wick at the bottom. These representations in the end denote the same thing: the first relevant entry of the big operators.
He recalls one of the most important quotes from Tom Williams’ book “Master the Markets” in which he says something like that the market does not like large trend bars with significant volume increase after a prolonged move as they usually denote an opposite sentiment.
- Observing a large bearish bar with a peak of volume and closing at minimums after a prolonged downward movement is a very clear indication of professional buying.
It is likely that this stock will reach an oversold condition in relation to the bearish channel that is respecting the price stock during the bearish movement.
The Psychology Behind Preliminary Support
We are now going to study the crossing of orders that occurs during such action. Remember, for someone to buy, there must be someone to sell.
Ask yourself what both the misinformed operator or “weak hand” and the well-informed operator or “strong hand” are doing at that point.
As we have said, the one who will be buying will be the big operator after determining that the market has reached a price of value on which to start an accumulation campaign. Those purchases you make come from sales that marry ill-informed operators.
We identify different reasons why these are the ones that provide liquidity to well-informed traders:
- 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.
Potential Preliminary Support
As we know that a bearish trend does not stop at once, it is possible to find numerous attempts to stop the fall before the successful one takes place. It’s the inertia of the trend. It is like a moving vehicle; once the cruising speed is reached, even releasing the foot of the accelerator, the car will continue in the direction for a time by its own inertia.
All those stop attempts are Preliminary Support. The more there are, the more likely it is that the last extreme of the bearish trend will finally occur without a significant increase in volume.
The fact of seeing repeated Preliminary Support suggests that the professional has been eliminating offer from the market and when the last minimum is reached, few will be willing to sell; and this will make that last extreme occur without a peak in volume. It will also be a Selling Climax, in this case without an ultra-high volume: the movement stops due to exhaustion. We’ll talk about it when we develop this climate event.
Actually, they are Preliminary Support from a functional point of view; because for the Wyckoff methodology, the Preliminary Support as such will be the penultimate attempt to stop the downtrend (the last will be the Selling Climax). Therefore, it would be best to label them as potential Preliminary Support.
This potential PS will be confirmed as the genuine PS when the price develops the four Phase A events that establish the character change.
This first participation of the professional does not imply that the price should be rotated immediately. As we have already commented; in certain market conditions the price will develop a V turn accumulating all the necessary stock during the fall. We repeat that although this type of hypodermic accumulation is not the most likely, we must be alert to its possible development.
Uses of Preliminary Support
But then, what’s the point of identifying this first stop event? As we have already mentioned, this is the first stop action of the bass movement and therefore we can draw two clear conclusions:
- It’s enough for us to stop thinking about the short side at least initially. At least initially because it could then develop a redistribution scheme to continue the fall, but we will deal with this later.
- This is an excellent point to take profits (close positions) if you are positioned on the short side.
We don’t want to be the smartest so initiating buying positions at this point would not be the most advisable.
As with Preliminary Support, this event can be observed in different ways:
- On a bull bar with increased volume and expansion in the ranges.
- On a set of bull bars with relatively narrower ranges and with a high and constant volume during all of them.
- On a single bull bar with high volume and a large wick at the top.
All these behaviours represent the same thing: the first relevant sales entry of the large operators.
The Psychology Behind Preliminary Supply
In this case, the one who will obviously be selling will be the large operator after determining that the market has reached a price of value on which to start a distribution campaign. Those sales you execute come from purchases that marry ill-informed operators.
We identified different reasons why ill-informed operators would want to buy at those levels:
- 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.
Potential Preliminary Supply
Before the real Preliminary Supply takes place, the most logical thing would be to find ourselves with numerous previous attempts. These attempts should be labeled as potential Preliminary Supply.
The fact of seeing repeated Preliminary Supply suggests that the professional has been eliminating demand from the market and when the last maximum is reached, there will be few who are willing to buy; and this could cause that last extreme to occur without a significant volume.
Uses of Preliminary Supply
Mainly we can use the appearance of this event for:
- Stop thinking about the long side at least initially (as the structure could evolve into a reaccumulation scheme to continue the uptrend).
- Take profit if you have open purchase positions.
As with Preliminary Support, it would be an error to initiate vendor positions at this point.